The coronavirus is turning out to be the biggest destroyer of wealth since the 2008 global financial crisis, wiping out an estimated $6-trillion in value off global stock markets and almost R1-trillion off the JSE all share index in the last week of February alone.
Yet for the contrarian investor, now may be the time to buy rather than panic.
While that may seem foolhardy given some of the dire economic predictions that have emerged, looking beyond the short-term noise is a strategy that has paid off handsomely in the past.
"Buy when there’s blood in the streets, even if the blood is your own" is the advice of Nathan Rothschild, the 19th-century financier who made a fortune buying gilts amid panic selling during the Battle of Waterloo.
Warren Buffett, perhaps the most famous contemporary investor, advises: "Be fearful when others are greedy and greedy when others are fearful."
While these aphorisms appear self-evident with the gift of hindsight, it’s rarely easy in practice when your share portfolio appears to be mortally wounded.
But "for a long-term investor it’s always a mistake to panic in this sort of situation", says Peter Armitage, CEO of Anchor Capital.
"Global markets were already quite expensive before the virus outbreak, so we’re not quite ready to buy the dip just yet. But for SA it’s essentially been a crash on top of a crash, which means you’ve got some bargain-basement valuations at the moment. In fact, I’ve only seen valuations like these twice in my 25-year career."
Armitage says the best opportunity for investors looking to capitalise on the virus-induced sell-off would be to load up on companies whose shares have been negatively impacted, but whose underlying business is not intrinsically linked to the effect of the virus.
These would include MTN, Shoprite, Curro, Redefine, certain listed property stocks and "all the bank shares".
"A share like Redefine is trading on a dividend yield of 18%," he says. "That’s certainly way better than you’re going to get in cash."
While Armitage doesn’t name individual shares he’d avoid due to the coronavirus, he does say he’d probably steer clear of shares exposed to travel, tourism and entertainment as they are most likely to be affected by the "stay-at-home bias" of consumers.
"It’s also not great for mining, given that China is the biggest global consumer of commodities," he adds.
That much is already evident from the plunge in Chinese manufacturing, with the country’s latest purchasing managers’ index, a gauge of manufacturing sentiment, falling to a record low in February.
Chinese car sales slumped an annualised 92% in the first 16 days of February.
And on March 2 the Organisation for Economic Co-operation & Development (OECD) cut its full-year global economic growth forecast to 2.4% from a previous estimate of 2.9%, and warned growth could fall as low as 1.5% should the outbreak intensify.
Still, Vestact CEO Paul Theron says investors should "keep calm and carry on".
"It’s possible that this coronavirus causes a big economic swoon — but unlikely," he says. "Selling into weakness is never a good idea, even for those with shorter-term timeframes."
But Theron is still not convinced that SA is the place to be investing, adding: "South Africans should invest offshore — period!" His chief argument is that SA economic policy poses a health risk to rand-denominated assets.
Yet offshore isn’t an easy destination right now, either.
In fact, investment bank Goldman Sachs reckons profits at S&P 500 companies could flatline at $165 a share in 2020, down from a previous estimate of $174 and unchanged from last year, as supply chain disruptions due to the virus create greater uncertainty.
JPMorgan Chase & Co also cut profit forecasts for the S&P 500 from a previous estimate of $180 a share to $174, due to the coronavirus’s impact.
But the predictions of both firms appear positively rosy compared to Citigroup equity strategist Tobias Levkovich, who says profits for US-listed firms could plunge almost 25% if the virus triggers a global recession.
Still, while it continues to spread across the globe, there are some tentative signs that China, where the outbreak originated, may have turned the corner.
The World Health Organisation (WHO) says the virus has peaked in China as new cases in the country are slowing down.
The 2%-4% fatality rate of Covid-19, as the disease is known, is also lower than other epidemics such as severe acute respiratory syndrome or Ebola.
Mortality appears to be highest for people over the age of 70, meaning long-term disruptions to the workforce should be minimal.
And central banks worldwide now appear primed to pump money into the financial markets by, among others, cutting interest rates.
So as the negative headlines continue to roll in, now might just be the time to keep calm and carry on rather than hit the sell button.
"If the virus’s impact is benign, there are certainly pockets of value emerging all around the landscape, and astute value investors are picking up cheap securities here," says Alex Pestana, a fund manager at RECM.
"Given the V-shaped recovery expected from economies in the second quarter, I very much suspect that professional investors will be looking for buying opportunities."
Lo, the black swan
A “black swan” event is an occurrence that is so completely unexpected that it’s virtually impossible to predict based on historical data or evidence.
The term originates from 82 CE when Roman satirist Juvenal wrote Rara avis in terris nigroque simillima cygno, which translates as: “A rare birdin this world, and very like a black swan.” Juvenal’s phrase was a common expression in 16th-century London for something that was deemed impossible. However, in 1697 a Dutchman named Willem de Vlamingh discovered black swans in Australia.
The term was popularised in financial circles by Nassim Nicholas Taleb’s 2007 book The Black Swan: The Impact of the Highly Improbable. Taleb theorised that black swan events typically have three characte ristics:
- They are so beyond normal expectation that nothing in the past can convincingly point to their occurrence;
- They have a major and often catastrophic impact; and
- Once the event occurs it is rationalised with the gift of hindsight as if it were entirely predictable.
Examples of black swan events include World War 1, the collapse of the Soviet Union and the September 11 terrorist attacks.
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