The COVID-19 pandemic has prompted a global shutdown that has rattled markets in ways unseen in over a decade. But even amid the extreme uncertainty, equity investors can follow several principles to navigate the challenging and changing times ahead:
1. Think out of the box: Imagine unlikely scenarios and try to connect the dots in ways that may not be immediately obvious. The global financial crisis of 2008 torpedoed numerous tenets of conventional wisdom. Remember, “Housing prices don’t go down”? Or, “Lehman Brothers is too big to fail”? Or, “GM will never be downgraded to below-investment-grade status”? In today’s environment, the unthinkable can become reality. Just a few weeks ago, who could imagine that air traffic would be almost completely grounded, or major cities like New York, London or San Francisco might be placed under lockdown? Don’t dismiss a question just because it’s never happened before. Similarly, don’t rely on past precedent to determine what types of stocks will provide stability in an allocation today.
2. Worry about the short-term path to recovery: Eventually, societies will emerge from this extreme uncertainty and life will settle into a new normal. However, it will probably take a while, and the global economy is likely to experience a deep contraction in the meantime. Stress-testing a company’s ability to weather various scenarios is critical to stock selection. Balance-sheet strength and cash-flow continuity in a severe downturn are two key indicators that can help identify companies that can survive. Some companies may report a big hit on the income statement as the economy contracts, but have strong balance sheets to see them through the trough and will be profitable when the situation normalizes.
3. Don’t lose sight of the long-term horizon: Short-term results are certain to be ugly at most companies, and investors may overreact. That’s to be expected: it’s human nature to focus on immediate stress rather than the horizon. But the valuations of companies that can pull through will depend on their cash flows postcrisis. Investors should try to forecast through the short term to identify equities that have been mis-priced by short-term market jitters. In some cases, crisis conditions create fire-sale prices for high-quality companies with the right stuff to perform well over the long term.
4. Imagine the post-coronavirus world: This isn’t easy to do when countries are still coping with a growing human tragedy and facing massive economic fallout. But investors must think today about what type of trends will reshape the landscape in the future. Some businesses won’t survive the crisis. Other business models will never be the same and may be permanently impaired, such as cruise lines. Companies may rethink business travel, prompting permanent changes in corporate behavior and spending. On the other hand, some companies will emerge as winners. Obvious examples include remote work applications like Zoom Video Communications and Citrix Systems, which are already becoming more routine and will become a more permanent fixture of normal business activity. But other less apparent examples will emerge over time, too. Some companies are well positioned to address entirely new business opportunities—that’s why out-of-the-box thinking is so crucial. What role will Amazon, FedEx and other businesses, like online educators, play in these challenging times, and how may their role in society change in the long term?
5. Be humble about what we know: Just as in the global financial crisis, governments are likely to adopt policies that seem unimaginable, and in many cases capricious. Investors should be humble about what they do know and what they don’t. Decision-making based on what policymakers or others may do is not investing—it’s gambling. Try to tune out the noise emanating from popular financial media and social media; instead, focus on equity fundamentals that can be understood, such as microeconomics, business models and cash flows.
Gaining perspective is difficult during a global emergency. It’s hard to ignore the endless flow of dramatic news, especially when markets are convulsing. But sometimes, it’s important to disconnect from the internet, take a deep breath and try to rise above the immediate chaos to visualize the day after.
The coronavirus health crisis is an unprecedented shock to modern society and the global economy. We’re all experiencing a historic dislocation that has touched the lives of every individual and unhinged markets worldwide. But investors can regain their footing by sticking to several strategic guidelines during a time of extreme uncertainty. Creative thinking, a sober assessment of the short-term challenges, and a focus on long-term business fundamentals and valuations all figure as keys to identifying the quality companies poised to survive through the pandemic and thrive in the new postcrisis reality.
Kent Hargis is Co-Chief Investment Officer—Strategic Core Equities at AllianceBernstein (AB)
Sammy Suzuki is Co-Chief Investment Officer—Strategic Core Equities at AB
Chris Marx is Senior Investment Strategist—Equities at AB
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.