Uncertainty levels are always sky-high when financial markets suffer bouts of extreme stress, and no time in recent history has presented as much upheaval as the current glocal pandemic that is shaking the world and the way we do things.
In times of uncertainty, opportunity also presents itself and for clever investors now is a good time to grab those opportunities that present themselves. Nick Balkin, a portfolio manager at Foord Asset Management, provides five investment strategies for dealing with the current uncertainty and gives advice on sifting through market noise to make astute investment decisions for the future.
1. BEWARE THE DINOSAURS
Dinosaurs are companies or industries in decline – also known as sunset industries.
Examples include the paper industry as the world goes digital; office space with falling demand as people work increasingly in virtual spaces; and the platinum sector as fossil fuel burning internal combustion engines increasingly make way for greener electric vehicles.
2. RIDE THE TRENDS
Invest in segments of the market that are riding current tailwinds. These are companies and industries supported by trends that may accelerate because of the global pandemic shock.
Examples include accelerating insurance sales as the dangers of being uninsured stay fresh in peoples’ minds, and companies in the digital sector that have benefited from “lockdown era” changes in consumer behaviour.
3. SHORT-TERM PAIN, LONG-TERM GAIN OPPORTUNITIES
These are opportunities where companies suffer short-term disruptions but their medium to long-term prognosis is unchanged. This is where the long-term investor’s time advantage becomes critical. Most market participants want instant gratification and will sell on bad news and come back when the news changes. That strategy carries price risk and will underperform one that stays invested.
We love these opportunities, but they are not risk free. The balance sheet must be sufficiently robust to endure short-term stress.
Examples include a few quality names in the beverage, restaurant and hospitality industries.
4. SUPPORT PERCEPTIVE MANAGEMENT TEAMS
No one has a crystal ball, but there are some secret weapons that can help long-term investors manage uncertainty — management, diversification and time. Good leaders will make strategic business decisions and implement them well as market dynamics change.
For example, the original investors in Naspers bought into a newspaper business. If they didn’t sell, they became owners of an excellent SA pay-TV business. These investors have now become owners of a global internet giant.
5. MANAGE THE KNOWN UNKNOWNS
Known unknowns include a series of emerging trends and behaviour shifts that can profoundly affect societies and economies in the long term.
Examples include potential unwinding of the globalisation trend of recent decades; changing consumer behaviour patterns affecting the way people live, work and play; the human employment consequences of accelerating trends in use of intelligent technology and machines; and socio-political shifts like increased radicalisation. Dynamic scenario analysis and probabilistic thinking are critical in managing these risks.
In conclusion, uncertainty has always been central to the investment management landscape. We must avoid extrapolating into the future the things we are feeling and thinking in today’s seeming chaos. While market inflection points create many risks, they also provide the best long-term opportunities.