On his official return to work, the prime minister stressed the UK faces a moment of maximum risk and could take backward steps, if lockdown is lifted too soon. Boris Johnson’s reticence is understandable, and investors are also faced with tough judgement calls.
Some patterns have emerged however, and while the road ahead for investors in shares is likely to have nasty bumps, it is worth noting early signals and taking time to question some of the perceived wisdom around recoveries.
Theme one: think carefully about defensives
Share prices have been extremely volatile, plunging on bad news and rallying in response to government stimulus packages and central banks’ announcements of rate cuts and support for the financial system.
Investors need to take a longer-term view when buying shares to ride out the current uncertainty. Companies like Unilever (ULVR) are traditionally seen as ports in a storm but, as Phil Oakley discussed in his Alpha round-up this week, the business still faces significant challenges.
Utilities are also sought after for their defensive qualities. Investors need to be aware that although they have stable cash flows, competing demands of interest liabilities, maintenance capital expenditure and in some cases pension scheme deficits, mean that dividends may not always be as rock solid as they appear.
Theme two: seek reliable income
Some utilities are better than others and water firm Pennon (PNN) did a fine job when it sold its waste management business Viridor at a good price, giving it the option to pay down debts and return cash to shareholders.
Tesco (TSCO) is another business where the dividend looks safe, not just because of high sales during the coronavirus lockdown, but because its finances are in good shape and the company is expected to complete the sale of its Asian operation later in the year.
Theme three: Which stay-at-home and big trend shares are analysts warm on?
Online supermarket Ocado (OCDO) has at times in its history divided opinion among analysts, but it scored well in our most recent share price and earnings momentum AlphaScreen. Investors should reacquaint themselves with both sides of the long-term case for Ocado but more broadly, stay-at-home stocks is a theme accelerated by the Covid-19 pandemic.
Stock screens are only ever a starting point for success but specialists in cloud technology and digital commerce services are prominent, so there are some interesting ideas (especially in Aim-listed companies) emerging for investors prepared to do the full due diligence.
Theme four: Pockets of hidden value
Protruding from the rubble of the coronavirus disaster are some quality businesses with recovery potential. Some of these companies operate in industries where the impact has been severe but those that survive could offer great upside in the years ahead. Travel operator National Express (NEX) has been hammered in the worst spates of selling but might well be considered to have rebound potential.
For even more intrepid investors, our small cap expert Simon Thompson is eyeing companies with hidden value on their balance sheets and that offer margins of safety, in case the coronavirus crisis continues to block catalysts for the shares to re-rate upwards.
Of course, there is no guarantee of the time frame for investments to come good – especially given the current situation – but for long-term investors in shares, now is time to at least plan their exit strategy from lockdown fear.
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