We continue to live in extraordinary times and the bull market that began just over a decade ago officially came to an end this week with dramatic falls across the piste. We are now in bear market territory and despite the strong rally in stock markets today, it looks a nailed-on certainty that current events will lead to a recession. Whether that recession is short lived and technical (i.e. 2 quarters of negative growth) or something worse than that, is anybody’s guess – nobody really knows at this stage.

COVID-19

Firstly, let me say that this looks like a horrible virus for those badly affected which appears to be the elderly and those with underlying health conditions such as cardiac or respiratory issues. My best wishes go out to those affected either directly or indirectly.

The government strategy in the UK seems to be to let this virus run its course while managing the flow of patients through the NHS by flattening the contagion curve. It remains to be seen how effective this strategy is compared to the lockdown measures we are seeing in other countries. I suspect we will have more deaths that other countries and less sick/old people to care for in the future but that might be overly cynical on my part.

Putting aside the human tragedy that is unfolding, my focus here is on how this pandemic is likely to affect my investments which I’m sure is the main reason you are reading this. It is after all an investment journal.

Volatility

It has been one heck of a week in the markets. In addition to the unfolding Coronavirus crisis, Saudi Arabia and Russia have launched an oil price war (that seems like old news already but it only started on Sunday) and we have seen a proper market crash for the first time since the GFC. Fear has finally returned to markets with around a year’s worth of gains given up during the week. Will this be a V-shaped recovery or do we have more market falls to contend with? I don’t have a Scooby!

But what I do know is this. If you are pre-retirement and investing with a long-term horizon, market falls like we have seen this week are a gift. Now is the time to be buying the dip and if markets fall further, to be buying more. This said, there are many stock specific risks that currently fall into the “known unknown” category due to the uncertainty caused by the virus and subsequent global events and therefore, buying indices via ETFs or trackers is probably the most sensible short-term approach when putting fresh funds into the market. Stock picking is going to be a minefield for the next few months with plenty of scope for earnings downgrades, profit warnings and I dare I say, company failures.

Let me tell you though, when you are running a portfolio that is in drawdown, as mine is, market crashes take on a whole new psychological challenge on top of the intellectual challenge presented by current events. Call me mad but I absolutely love periods of volatility and market pivots like this. What follows is a summary of my trading activity during this period along with my rationale.

Trading Activity and Rationale

My portfolio currently has 23 constituents. Every holding pays a dividend and my intention is to hold each for the longer-term as long as the investment thesis remains valid. I assess this based on business performance rather than share price (mostly). My living expenses are covered by dividend income, so I can take a slightly more relaxed view on capital fluctuations. This said, my portfolio is very much a growth portfolio that provides an income rather than a pure high yield portfolio, so capital gains are part of my plan.

This week I have added to several holdings that will, in my assessment, be either unaffected or positively affected by current events. I have avoided adding to holdings where the short-term future (2020 business performance) remains less clear. My Twitter timeline seems to be full of people trying to pick the market bottom before committing funds (and a fair number of my Twitter buddies had built up a decent cash pile before this period of volatility, so fair play to those folk). My intention this week has not been to try and pick the bottom but rather, to buy when the value looked compelling in shares/funds where the investment thesis also remained sound, in my assessment.

Below is a list of my purchases (as per my inter-week Tweets) all of which are top-ups of existing holdings.

Anglo Asian Mining (AAZ) – This is my largest holding and also my largest loser in both £ and % terms this week. So naturally, I have bought more! I can’t think of many places less likely to be affected by Coronavirus than a remote mining village in a country that is proactively denying entry to people from affected countries. And with interest rates falling still further this week along with the likelihood of more QE next week, the price of gold should recover (anything above $1500/oz is a bonus for AAZ this year who have used $1480 for their production guidance). And of course, in the background , there is the prospect that they are in play as a takeover target (as per the house broker comments last week) news of which could come at any time. Until this plays out, I shall content myself with a 5-6% dividend yield.

Legal & General (LGEN) – I really liked LGEN results when they were published a few weeks ago and I have taken the opportunity to rebuild a position (LGEN is a former holding) during this period. There is market risk with LGEN but it is an exceptionally well managed, conservative business (e.g. bonds held to maturity, equity strategy biased towards passive rather than active funds). Perhaps life insurance claims will rise are a result of the pandemic (how many over 70s have life insurance?) but also, their exposure to defined benefit pension schemes (a key part of their growth strategy) is likely to see liabilities reduce as a result. At 8-10% dividend yield, I believe LGEN offers compelling value.

Money Supermarket (MONY) – A recent addition to the portfolio and one that I was happy to add this week. A 4%+ dividend yield – people are still going to be buying home/car insurance during this period and perhaps increased demand for energy switching and personal loans.

Rightmove (RMV) – Another relatively recent addition to the portfolio. Not a high yield (1.4%) but likely to continue growing in 2020. Estate agents are committed to a monthly subscription which RMV increases each year and most weaker estate agencies would have failed last year. So, there is unlikely to be any negative impact on RMV as a company.  

Strix Group (KETL) – I reduced my holding here when Coronavirus first became an issue in China (due to supply chain concerns). I added some back once the company updated the market and now that China is getting back towards full capacity, KETL seems a likely beneficiary. As an added bonus, they have a product that might prove beneficial to controlling the spread of the virus in workplaces. Dividend yield is 5%+

Henderson Far East Income (HFEL) – Now that China is getting back to work, the companies held by HFEL are likely to recover. A dividend yield of 7%+

Vanguard Emerging Markets (VFEM) – Again, this purchase is also based on the China recovery with a focus more on growth (Alibaba and Tencent are the top two holdings) but nonetheless, a useful dividend yield of 2.5%

Spectra Systems (SPSY) – This company is part of central banks’ supply chain and therefore, unlikely to be adversely affected by current events. Moreover, they might benefit as they have a banknote cleaning product, demand for which might rise, perhaps. Aside from secure revenue streams, the company has several major growth opportunities, alongside a dividend yield of 5%+

I must emphasise that none of the above purchases are aimed at making a quick one-off return based on current events and volatility nor am I trying to time the market. I am intending to hold them for a long time and my investment thesis for each is a combination of sustainable growth and secure income.

Final Thoughts

Nothing is more important than our own health and that of our families. Also, a lot of people will run into financial challenges over this period such as the self-employed/small business owners, those who are part of the gig economy, people on zero hour contracts and those facing redundancy.

To anyone affected by the above, I wish you well. These are extraordinary times and normality will return at some point, life will go on and markets will find a way to muddle through.

Stay safe and stay strong,
Simon

Disclosure – At the time of writing, I own shares in AAZ, LGEN, MONY, RMV, KETL, HFEL, VFEM, SPSY which were all mentioned in this article