Investing for long-term growth is something that I believe everyone should partake in, which is why I enjoy sharing my analysis on this website. At a rough estimate, I believe that I know nearly 3,000 stocks intimately, in particular in the UK and USA. I trade daily in vertical options and short positions. But for the last six weeks, finding good long positions in UK stocks has been so troublesome that I have been unable to recommend any in this column.
The challenge right now is not one of choices, but of timing. For all the talk of ‘buying the dip’ of 23 March, many of the gains driven by the FOMO-rally since March have since been wiped out again. Last week, prices in the UK have started looking very volatile. There is much talk from analysts about stock prices having become detached from the reality of the post-COVID economic outlook. FTSE 100 stalwarts such as Barclays and Aviva have paused their dividends for at least the next year, with no guarantees they will return in 2021.
We are in unchartered territory with a real possibility that the UK market could become a bull trap: an ‘emperor’s new clothes’ scenario where investors who bought the dip in expectation of a quick recovery drove prices up into a self-perpetuating rally, only for the bullish emperor to be found to be naked and exposed as bad news, such as the extension of the Government furlough scheme until October, causes the hard economic reality to set in. Some prices are now reversing back to never-seen-before lows – and inflicting heavy losses.
A lot of conventional wisdom has been overturned too. Before the crisis, the compounding effect of investing in the low volatility of long-established FTSE 100 stocks with a regular and reliable dividend stream was almost a surety for long-term investment growth. Yet during the crisis it is non-dividend-paying ‘newbie’ growth stocks such as Ocado that have proven robust. Investors have rushed into tech as traditional dividend stocks have fallen sharply.
We also have heightened risk velocity, with a social-media-driven news cycle and the interconnectivity of globalisation increasing the pace at which fresh bad news or even an unforeseen ‘black swan’ event could negatively impact markets and trigger more sell offs.
Yet bullish optimism is also not entirely misplaced. People have short memories and life often has a way of confounding economists. We saw this in 2003 when global markets rebounded quickly after the shock of the SARS virus. And share prices today are significantly down from their pre-COVID 52-week-highs precisely because they are (theoretically) pricing in big drops in GDP, higher unemployment and growing acrimony between the US and China. Shell and BP have suggested, but not yet confirmed, that they intend to pay dividends. British American Tobacco, GlaxoSmithKline, Rio Tinto, AstraZeneca, Vodafone, BHP and Imperial Brands are also forecast to continue to pay out their dividends in 2020.
Yet whilst I admire the fortitude of the bullish view, I find it very hard to share in its optimism. The only solution as I see it right now is to look for long-term stability. And this has piqued my interest in a FTSE 100 stock that may prove itself to be a sleeping giant: BT (LSE:BT-A).
Yes, BT has just axed its dividend for the first time in history. It has a huge £18bn liability arising from its debt and £50bn of pension liabilities. It must spend £12bn to upgrade its network in coming years. And prior to some false media reporting about its plans to sell off OpenReach at a valuation of £20bn, which caused the stock to rally, last week the price of BT was at historic lows with a market cap of only £10bn, down from £50bn in 2016.
Given its current low price I’m now closely watching BT as a prospect for a very long-term investment. A new tie up between O2 and Virgin to challenge BTs deep reach into 18 million UK households validates the future opportunity. But it will be very hard to shift BT from its entrenched position. BT is already very far ahead of competitors in introducing 5G, and has the scale and organisational memory to make full fibre a reality in every UK home.
This will become all-the-more important because of some imminent mega trends. In a post-COVID world, I predict that working from home, video conferencing and streaming entertainment will be endemic with near-total adoption across the full UK population. The world is also on track to connect 1 trillion sensors to the Internet of Things at the dawn of an artificial intelligence revolution that will change and impact every aspect of our lives. BT’s reliable 5G and full fibre internet connections will be absolutely crucial for all of this.
In my view, the world is changing in favour of BT. A major restructuring is already under way. BT could yet prove itself to be a sleeping giant and re-emerge next year as a dividend-paying growth stock. The question is exactly when this sleeping giant will awaken, and thus whether the right time to invest is now. At this low price, BT certainly looks tempting.
