Some years, investing is all about the detail. Companies’ individual destinies drive their share prices. 2020 isn’t one of those years. It’s a year of the big picture. Even well-run or high-potential companies have been deeply impacted by macroeconomic factors like the pandemic, lockdowns, recession, and the stock market crash.
Relatedly, prices of oil and gold, and interest rates have become increasingly significant too, given the sharp movement seen in them. I think we can still make gains, however, if we adjust our investing sails to this change in wind, which I suspect will guide stock markets in the foreseeable future too.
#1. Stocks to beat the recession
In this article I look at four of these macro drivers – recession, oil and gold prices, and interest rates – as the starting point for deciding where to invest. First, the recession. Technically, the UK is no longer in recession, and I for one am not entirely pessimistic about its prospects. But given the unpredictability of the times we are in, the possibility of falling back into it can’t be ruled out either. If there’s another recession or more likely, growth remains soft, I’d bet that defensives will continue to do well. Think about buying FTSE 100 stocks like AstraZeneca and Unilever with this in mind.
#2. What to buy when oil prices fall
Next, oil prices are closely tied to economic cycles. A slowdown, coupled with a steady move towards cleaner energy sources means that oil prices will remain subdued going forward. The International Energy Agency has revised down its oil demand forecasts for the remainder of 2020. As a result, big FTSE 100 oil companies like BP and Royal Dutch Shell can remain in an uncertain place. I’d counter this trend by investing in companies that support the electric vehicle trend like Johnson Matthey and Rio Tinto.
#3. Riding the gold wave
A soft economy and gold price increase go hand in hand. It follows that if we forecast that a slowdown will continue for now, the gold price should remain elevated. While there are many gold stocks to choose from, I’d focus on FTSE 100 precious metal producers like Polymetal International. It showed robust equity market performance even before the stock market crash. It also increased its dividend recently.
#4. Beneficiaries from low interest rates
Last, consider interest rates. I don’t think there’s any dispute about the fact that low interest rates are bad news for banks. They are a response to poor economic conditions, which means lower credit demand in any case. Lower interest rates further reduce bank incomes. But, low interest rates also spur recovery. As the price of loans falls, both individuals and companies are encouraged to take on credit. I think real estate companies can benefit from this trend. Almost half of UK’s house ownership has been made possible through active mortgages, as per Bank of England numbers. I think FTSE 100 housebuilders like Persimmon and Barratt Developments are good examples of gainers from this trend.
