Setting your own equity investment guidelines in this crisis

  • Apr 17, 2020 AEST
  • Team Kalkine
Setting your own equity investment guidelines in this crisis

Looking at your investment portfolio may be making you worry, as much of the wealth has been destroyed, just because people ate infected bats in China (as has been alleged). However, the markets have reacted appropriately to the crisis by going into bear territory after a long while.

Now the companies are looking to raise capital and preserve cash amid the crisis to navigate effectively to the other side of the crisis. It is the time for investors to revisit the portfolio and undertake crucial decisions to make the better out of the crisis.

A crisis is followed by a recovery, which should be an inspiration for us to make the right decisions at the right times.

Related: Guide to Invest in 2020 Bear Market

Define your investment objectives

There should be clarity on why you are investing that would shape your investment process. Knowing where you want to be in say five years is crucial for investment planning and decision making process. It would enable you to filter the investment options you have currently and how suitable those options are to achieve your desired outcomes.

Investing in low risk assets

Investing during a recession could be challenging for investors and excess risk-taking could lead to wealth destruction rather than the creation. Playing it safe should be the way for investors to approach investments amid a crisis. The investors consider companies that can weather the shock of a recession, and these include businesses with low debt and visible cash flow streams. Moreover, investors could also consider taking shelter in lower risk investments.

Defensive businesses

Search for safer investments usually ends in defensive businesses. Consumer staples, telecommunication and utilities are considered as defensive businesses traditionally, but investors could focus on the cash flow sources of businesses to determine the defensive proposition. Consumer staples sector include a wide range of businesses such as food retailing, personal care and household, beverages, tobacco etc. 

Although many other businesses, apart from the traditionally defensive sectors, have sustainable revenues even during a crisis. Consider technology businesses that help running other businesses or enterprise solution businesses. Likewise, healthcare equipment businesses could be one of the other examples of defensive businesses.

Diversification remains the key

Portfolio diversification is arguably the most important process an investor has to undertake in its investments. It enables investors to build a shock proof portfolio of investments having multiple attributes, including dividends and growth.

With diversification, the popular phrase ‘don’t put all your eggs in one basket’ comes into perspective. Even though it is recession, all of your investments into defensive sectors could pose a threat to your desired returns, and maybe some high growth tech stocks could prove to be the saviour of your portfolio.

The term diversification is not just limited to sectors. One can look across asset classes, including fixed income, commodities, real estate, precious metals etc.

Dividend stocks; improve your yield-to-cost

Dividend stocks are income generators in a portfolio, and amid a crisis, such stocks may lose much of the price appreciation gathered over the past, thereby causing the dividend yields to reach extremely high levels.

An extremely high dividend may also indicate that investors are not expecting the same amount of dividends as previously announced by a company, which is why most of the investors are selling the shares, causing prices to fall and dividend yields to be higher.

When prices hit lower levels, it enables an investor to increase the yield-to-cost. Acquiring shares, at lower prices, of companies having the abilities to grow dividends when economic recovery kicks-in would enable investors to improve yield-to-cost as an economic recovery is likely to improve investor participation, thus share prices.

Investors often look for companies with solid dividend paying history, low debt-to-equity ratios, demonstrated capital allocation, and resilient management.

Take a long term view 

During a crisis, the short term outcomes for companies could be detrimental, causing investors to overreact. It is the behaviour of human to react on the immediate outcome rather the long term implication, and amid a crisis, it is very important for investors to look beyond the first-order outcomes.

Investors could look at the companies that have been mispriced by the markets due to short term jitters with the long term prospects of business remaining intact to deliver shareholder value over the long term. Market participants are likely to witness tumbling share prices amid a market-wide sell offs of high-quality companies, which are likely to deliver superior results over the long term.

Look beyond the crisis

Countries are navigating through a human health crisis that is causing a major economic fallout, which makes it important for investors to consider the world beyond the crisis. Emphasising on the post-crisis world and how the trends would unfold after the crisis is vital for sustainable investment returns.

After the crisis is passed, it would uncover the winners and losers, and having winners in your portfolio is likely to deliver value for the investors. Consider the changes to travel plans of people across the world, the potential increase in health consciousness, the face of online businesses post crisis etc.

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