A few years ago, I attended an investment conference at which a fund manager outlined the investment opportunities thrown up by the global financial crisis of 2008. He said it was like “walking down the street and picking up 20-pound notes because the price of well-managed companies in robust good health had fallen to incredibly low valuations”.
Similarly, the world’s greatest investor Warren Buffett laid the foundation for his fortune in the 1930s when the Wall Street Crash had soured Americans’ appetite for equities. As a result, “in his early, glory days, stocks were cheap, and Buffett had scooped them up in handfuls, almost alone in noticing the golden apples lying untouched on the path”, as his biographer Alice Schroeder noted. He was thus able to buy shares for US$30 that produced a dividend of US$29. In other words, the investment virtually paid for itself within the first year and, from then on, it was pure profit.
The Covid-19 epidemic may well be creating similar opportunities for those investors who think long term. Now, I understand there are some people who think this might be a ghoulish approach, exploiting an awful episode for personal profit. I feel desperately sorry for those people who suffer the loss of loved ones, and/or financial hardship. But hopefully this will be a short-term episode, awful as it is, and a cure for the illness will soon be found. Meanwhile, financial markets must continue to function so that one day we can all go back to normality. That means buying, as well as selling, financial instruments.
Slow and steady
So, what should investors be doing? Panicking and selling is almost certainly the worst option, according to Simon Batten, an Independent Financial Adviser at KMI Consultants:
“Yes, financial markets may well experience further losses but longer term they will almost certainly recover and, unless you desperately need cash now, the best option is to remain patient. If you have cash to spare, it may also be worth exploring whether there are any bargains to be had. Drip-feeding your money slowly into the market is the best way of ensuring that you profit when the market picks up. Trying to time the bottom is impossible and you may well miss out when the market turns because when that happens, share prices could move up very quickly.”
The measures governments are putting in place to control the Covid-19 virus are certainly having a massive impact on economies. Indeed, the global economy is probably already in recession and a further descent is likely to prove swift and painful. But investment firms such as Goldman Sachs are forecasting that this will be a V-shaped recession and recovery so that the economic revival will be equally swift and sharp.
For one thing, the massive fall in oil prices will put large sums of money back into consumers’ pockets. It is effectively like receiving a large tax cut. Moreover, there is the massive fiscal and monetary stimulus that governments are unveiling and there will be huge pent-up demand once the control measures are scaled back.
High yielding stocks
So where are the opportunities? My personal option is to slowly buy shares in large, steady UK companies that are now offering very attractive dividend yields as well as funds that track the FTSE All-share Index. The yield on that Index stands at just over 6% on March 18, a very attractive level of income given how low interest rates have fallen.
Meanwhile, the dividend yield generated by the energy giant Royal Dutch Shell is an incredible 15%. Of course, given the slump in oil prices, it is possible that Shell could cut its dividend. But major oil companies such as Shell, BP, Total, Exxon Mobil and Chevron haven’t cut their dividends in 30 years and Shell hasn’t done so for 70 years.
You can also get a yield of more than 10% on the UK insurance giant Aviva. It recently confirmed that it is still planning on paying its dividend in May. It has also pointed out that it has a robust capital and liquidity position and is acting to reduce its exposure to potential economic shocks. The yield on the UK bank Lloyds is just under 10%.
You can also get a very good dividend yield on companies whose financial position should be even more secure. Take utilities that supply essential services such as energy and water. The UK’s central energy system operator, National Grid, offers a yield of 5.5% at the time of writing.
Supermarket operators are one area of the market that are likely to see profits rise as a result of the virus given the sudden jump in demands for their goods. Yet, one of the UK’s largest operators Sainsbury offers a yield of over 6%. Tate & Lyle, which provides essential ingredients and solutions to the food, beverage and other industries, offers a yield of just over 5%.
Financial markets will almost certainly endure further turbulence but history shows that markets do recover. Be patient. Invest in a mixture of sound companies offering good yields as well as indices that track the wider market. Most of all, remember that as the journalist Merryn Somerset Webb recently wrote in the Financial Times, “it is often an awful lot easier to buy value slowly on the way to the bottom than to try and chase markets back up”.
By Anthony Beachey
Anthony Beachey is a former BBC World Service journalist now working on a freelance basis in Portugal, where he specialises in economics and finance.