When history looks back to 2020 it will record that the FTSE 100 fell into a bear market because of the dual gut punch of a novel coronavirus outbreak and a Saudi-Russia oil price war.
Both of those events are still playing out. It’s clear that we will feel their effects for years to come.
Bear markets are usually defined as periods when stock market indexes drop 20% from a recent peak. For us, that peak was around 19 February. The FTSE 100 stood at a now-unthinkable 7,457 points. But despite those crushing lows in March, the FTSE 100 has recovered by 19%. From a 23 March low of 4,993, the index has reclaimed nearly 1,000 points.
Whether this recent rally is sustainable is a matter for debate. If the pubs were still open, it would be order-of-business number one on the table between my investor friends and me.
Keeping hold of my portfolio of funds, FTSE 100, FTSE 250, and AIM companies has been an emotionally taxing process.
How to profit
One thing is certain. Choppy markets offer up a bunch of new opportunities for investors with cash on hand.
Most of the UK’s largest firms have said they have little to no visibility on their 2020 earnings. So company valuations will be necessarily inaccurate in the months to come. Long-term investors should be able to take advantage of this kind of mispricing.
As I said in the wake of the worst stock market crash since 1987, I’ve been stockpiling cash. I now have around five figures ready to deploy. And I’m ready to pounce whenever I see the market significantly undervaluing good companies.
Grin and bear it
You wouldn’t be human if you weren’t nervous of further falls in your portfolio. I was stunned by the steep drop in my net worth when the FTSE 100 crashed. About 15% of my ISA wealth was wiped out in a day. It’s been painfully slow, but because I stayed invested, I’ve regained everything that was lost.
Of course there will be businesses that simply run out of cash before the economy reopens, never to resurface. But my focus now is on the businesses I think will not just survive a 2020 recession, but thrive as life slowly returns to normal.
I’m looking to add to my holdings in 10%+ yield energy supermajors BP and Royal Dutch Shell. The 8.5% yield in Legal & General is attractive, too. And I think a new investment in a FTSE 100 UK housebuilder with relatively low debt and a conservative gearing, for example Taylor Wimpey, makes a lot of sense, too.
I would add that I think consumer habits will be changed forever by the coronavirus outbreak. I’m looking at outsourcing companies like Bunzl to profit from the extremely elevated level of purchasing in industrial cleaning supplies, for example.
Bear markets all share particular characteristics. Sellers, not buyers, set the price. Investor sentiment cycles rapidly between hope and despair. But bear markets are where small private investors like you and me can set ourselves up for some of the strongest gains we will ever see.
