The Anticipated Second Stock Market Crash: 5 Tips For Investors

Summary

• As second wave of the pandemic seems inevitable, a steep correction in prices is expected
• The markets have been through several economic disruptions in the past and have recovered strongly
• 5 tips to keep in mind as the second stock market crash might take place

Many of the economic activities, which were halted due to the coronavirus-imposed lockdown, have recommenced operations from June 2020. The British economy is reopening gradually with new sector specific safety guidelines. The UK’s broader equity benchmark index, FTSE 100 was trading steadily over the 6,000 mark for the month of June 2020.

Consumer confidence and the market sentiments seem to be gradually improving due to phased reopening in the recent weeks as people have started making lifestyle changes with respect to the novel coronavirus.

However, a sudden spike in cases recently in the United States could put some businesses in choppy waters once again, since the fear for a second wave of the pandemic still exists. Notably, local lockdown was imposed in Leicester, a city in London, due to sudden rise in the number of coronavirus cases. Few weeks ago, a similar spike in the coronavirus infections in the US coupled with a gloomy outlook released by the US Fed sent jitters to the stock markets across the globe. Further, the slow reopening of the economies is also taking a toll on the global oil and gas industry. Additionally, last but not the least, the impact of the novel coronavirus is not only limited to equity and debt markets, but has also impacted the currency and the commodities markets by affecting the oil prices and steel production.

Also read: Stock Market Jitters of Second Wave and Economic Disruption

While the street-smart investors could be investing in equity as an asset -class or related instruments during these unprecedented times, there might be others who get demoralised and panic in this period of a global meltdown.

It is pertinent to note here that several economic disruptions have occurred in the past few decades, such as the Asian Currency crisis in the late 90’s, or the Global Financial crisis in the year 2008. Despite these major corrections, the stock markets have bounced back.

The UK stock market has also witnessed similar wealth erosions in the past. During 2002-03, when SARS broke out, the FTSE 100 fell steeply by more than 30 per cent within a period of six months. However, it took nearly three years for the broader equity stock market index of the UK stock exchange to fully recover from the SARS shock. Similarly, during the financial crisis of 2007-08, the FTSE 100 fell steeply by nearly 45 per cent within a period of nine months. After that, it took nearly three years for the UK stock markets to recover completely.

‘Buy low, sell high’ is a standard strategy practiced across the industry. Investors are consistently looking to tap these kinds of opportunities. The erosion of market capitalisation of businesses is looked upon as a correction in the market price of these securities by the potential investors. Those who are willing to invest now or have missed the chances in the stock market crash early this year might be looking to avail the opportunity as there are speculations of yet another stock market crash.

Also read: Echoes of financial market crash uplifts value investors to hunt for multi-baggers

While it can’t be denied that the markets have recovered quickly from the bottom that we saw on 23 March 2020 and we saw an almost ‘V’ shaped recovery in the stock markets; however, the root-cause of this devastation, i.e. getting business revenues up at similar levels, has not been achieved as yet. In fact, these businesses have piled up a lot of debt in the form of bailout packages launched by the British government. These debts come with payment holidays and credit moratoriums which mounts excessive pressure on the banking sector. Governments fear that a portion of the total corporate debt may never be recovered as the related companies are in deep red. Therefore, investors should study the stock fundamentals closely before making an investment decision, rather than blindly following the market trend or simply listening to investment experts.

5 Tips for the Investors to watch out for

• Invest in Fundamentally strong companies through value investing

Look for fundamentally strong companies. For instance, if a company has been displaying a stable revenue stream even in the midst of the unprecedented corona crisis, it is a testament of its resilient business model and consumer confidence towards the company’s product and services. While the economic impact of the coronavirus could have brought about a steep correction in the pricing of such a company, one may ponder over adding it to his or her portfolio.

Another tip is to always go in for value investing, which is all about determining the intrinsic value of a stock. To figure out if the stock is overvalued or undervalued and to what extent, valuation measures such as Price-to-Earning (P/E) Ratio could be used.

• Stay away from bottom-fishing

Another essential tip, especially for beginners, is that during these unpredictable times, do not be tempted to time the market and try to catch the bottom. A price bottom can only be determined once the price of the security recovers substantially. This is the point where most of the investors generally tend to make mistakes. In a stock market crash, companies with solid fundamentals will create significant opportunities for investors as valuations are likely to be quite attractive.

• It is important to remain invested throughout the market cycle

Staying invested throughout the market cycles leads to cost-averaging in terms of buying securities. This also takes care of the need to time the markets which is a very difficult thing to do.

Further, a lot of stocks might have lost their value, but they have been paying out dividends. Therefore, regular income seekers could consider dividend paying stocks. It is also important tool to sail through this period of volatility.

• A diversified portfolio is the key to success

Another important point to note is finding the right balance in the portfolio-mix, which is commonly remain invested throughout the market cycle should carry out proper research or seek help from financial advisors, whether it is a portfolio of securities or pooled investments. A good idea is to invest in a variety of assets like stocks, fixed deposits, gold coins, and real estate.

• Always create a contingency fund

Cash has always been the king and it is a good idea to maintain liquidity during unpredictable times. Therefore, one must earmark a separate amount of money for the rainy day or to pay bills for at least one year. In addition, one should have the right health insurance cover. Most of the insurers are either rolling-out new dedicated policies for protection against the Covid-19 flu or are offering them as an add-on cover to their existing policy, after WHO declared it as a pandemic.

Also read: 5 FTSE Stocks to Watch In A Market Crash

This is a period of unprecedented crisis as the world seems to be in an uncharted territory. It is not clear when the pandemic will end from the world and how much economic devastation it will lead to. While the stock market recovered quickly once governments started to pour in fiscal support, however, now they fear that the dent will be deeper than what was expected earlier. Therefore, there are speculations of a second stock market crash, which would lead to steep correction in prices of securities and could provide another opportunity for investors. But they should keep these tips in mind to maximise their gains – looks for fundamentally strong companies, stay away from bottom-fishing, remain invested throughout the market cycle, diversify and have a contingency fund.