Only when the tide goes out do you discover who’s been swimming naked – Warren Buffet.
The high tide the markets were recently experiencing has been sucked out far quicker than a gentle lunar induced low, being more like a rapid tsunami drop just before the inevitable wall of water. That tsunami may not hit us if the Coronavirus infection rate can be slowed and things return to near-normal in a few weeks or months, much as they are now in China after they first reacted back in late December. Here’s hoping.
I personally think having lots of toilet paper and long lasting foods in the pantry could become our new normal. We’ll hold onto more inventory because we now know that these types of events can happen. Some of my relatives who went through World War Two always had a minimum of 6 months of certain foods to hand. I get the feeling something similar could happen here.
But enough about dunny paper and tinned food. Even if things do come back reasonably rapidly, will investors start to behave differently?
The rapid drop in the tide has made solid, profit generating companies with proven business models look pretty attractive. BHP has been digging up iron ore for a hundred years and will probably be digging it up in a hundred years’ time – and iron ore prices are still high. Coles and Woolies are the go-to places right now for our new, er, inventory craze. These businesses have been returning real cash to investors for years and they aren’t going away even if we all have to sit at home for a few weeks.
What about those businesses that haven’t been generating profits? The businesses that have been surviving by the grace of shareholder capital in a sustained a bull market may have a more sceptical ruler run over them from now on. Investors may start to think that revenues and profits actually matter.
Even some established, profitable businesses that have very high valuations may fall back to more reasonable levels as investors realise that the previously assumed growth rates aren’t going to materialise.
eInvest’s actively managed Shares for Income ETF – EIGA – only invests in companies with proven track records, solid profits and reasonable valuations. It is designed for investors who want income while still being in the share market for long term growth. Recent market conditions have seen everything sell off, but during the GFC we saw share prices fall around 50% while dividends only fell around 20%. In the end it’s hard to go past a proven business that makes profits and trades at a reasonable price.
Disclaimer: Please note that these are the views of the writer, Tamas Calderwood, Distribution Specialist at eInvest and is not financial advice.