What would I do right now? It’s a highly relevant question as a lockdown market crash might be near, even if it’s less dramatic than the last one. Coronavirus cases are on the rise and as a result, many stock indices are falling now.
Lockdown market crash
Prime Minister Boris Johnson is expected to announce tougher measures tomorrow. These might include closing all bars, restaurants and hotels. Although many people say a second lockdown would be a complete disaster for the British economy, some say it’s a necessity as coronavirus cases have surged in recent days, due to lockdown easing measures, and especially a return to schools and offices.
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It seems investors have plenty of things to worry about as the market crash could be around the corner. So what should they do?
What would I do right now?
To start with, I think the market hasn’t reached its bottom yet. The risk of a second lockdown isn’t the only problem we’re all facing. There’s also the probability of a hard Brexit. Then we have many geopolitical risks, including US-China relations and most importantly, the US election.
But I think there’s no need to panic. Instead, I’d look at my current portfolio holdings. I’d check the companies’ cash positions and balance sheets. But valuations matter too. So, I’d sell all my shares of unprofitable companies with low credit ratings. In some cases, they’re expensive too. But of course, I wouldn’t get rid of all my stocks. Companies with high credit ratings that trade at low price-to-earnings (P/E) and price-to-book (P/B) ratios are key to every portfolio’s success. So I always hold and cherish such businesses.
Which brings me to where to invest if you have spare cash. It all depends on your attitude towards risk. Given that we might experience another lockdown or two, I assume airlines and cinemas aren’t for the faint of heart. However, if you’re a really patient and risk-tolerant investor, you might like to look at companies like Cineworld.
My top picks
I’d personally refrain from investing in that type of businesses just now, however. Instead, I’d prepare a portfolio of dividend-paying companies. What’s more, I’d invest in ‘necessities’. In other words, my picks would be firms producing and selling food, hygiene items and medicine. No matter how much the economy is struggling now, we all need to buy these types of goods.
I’d go for the largest players in their fields too. Among my favourite picks are Unilever, the third largest consumer goods company globally, and GlaxoSmithKline, a top pharmaceutical company.
But would I buy them right now? No. I’d buy these companies after a major sell-off, not just ahead of it. While GlaxoSmithKline with a P/E ratio of just about 16 isn’t too expensive, Unilever with a P/E of over 20 doesn’t look like a bargain to me. I’d prefer to buy both of these companies at lower valuations.
There’s also one key way to hedge a portfolio that I would consider now. That’s through buying gold miners’ shares. Gold is the number one safe haven when the world is facing a lockdown market crash. It’s also protection against inflation. But the yellow metal has an important disadvantage. It doesn’t pay dividends, whereas gold miners often do.