The number-one risk top portfolio managers are concerned about right now is a second wave of the coronavirus. In July’s Bank of America fund manager survey – a monthly survey that canvasses the views of top fund managers around the world – over 50% of respondents said a second wave of Covid-19 was the biggest risk to share portfolios. Meanwhile, in August’s survey, about 40% said the biggest threat to portfolios this year was the worsening of the Covid-19 crisis.
In my view, a second wave is a valid concern. Until a vaccine is launched and available to everyone, we can’t be sure that Covid-19 won’t return. A second wave is a real possibility. This could have a drastic impact on financial markets. UK shares could take a big hit.
Now’s the time to be thinking about risk management. So, how can you protect your share portfolio from a second wave?
I’d avoid these stocks
The first thing I’d do is check your exposure to UK shares that could be hit hard by a second wave. Examples include airline stocks (easyJet, IAG), cruise ship operators (Carnival), pubs (JD Wetherspoon), cinema operators (Cineworld), and gym operators (The Gym Group).
If we see a second wave, it’s likely that these kinds of stocks will underperform. You don’t want to be overexposed.
UK shares I’d buy for a second wave
Then I’d focus on building a portfolio that contains UK shares that should do well no matter what happens with Covid-19. Specifically, I’d focus on three main types of businesses.
Firstly, I’d invest in consumer goods businesses, such as Unilever and Reckitt Benckiser. These are highly reliable, dividend-paying companies that tend to hold up well when the economy is down.
Reckitt Benckiser, in particular, is a great UK share to own right now, in my opinion. It owns the largest portfolio of surface disinfectant brands including Dettol and Lysol. It’s also recently launched a new professional services division to help organisations keep their customers safe. In my view, Reckitt Benckiser is a classic hedge against a second wave.
I’d also buy healthcare stocks. Like consumer goods companies, healthcare companies are quite resilient. People still need medication during a recession. Two FTSE 100 healthcare companies I like are GlaxoSmithKline and Hikma Pharmaceuticals. The former specialises in vaccines and consumer healthcare products. The latter develops branded and non-branded medicines. Both UK shares are also reliable dividend payers.
I’d also buy shares in UK businesses that could see higher demand for their services in a second wave. Some examples include IT specialists Computacenter and Softcat and communications specialist Gamma Communications. These companies should all benefit from the work-from-home trend. In a second wave, they should outperform.
They are the three main types of UK shares I’d be buying right now. Own a fully-diversified portfolio that contains a number of different companies and your share portfolio should hold up well if we see a second wave.
