Last week it became official: most global stock markets have now seen a drawdown of over 25% this year. This makes the market ‘correction’ a ‘crash’. The FTSE 100 index has been particularly hard hit, down almost 30% from the highs seen earlier this year.
But from the viewpoint that this is not likely to be long-lasting (one article I saw said the virus should be receding in the UK from the end of April), this could present some great buying opportunities. During times of extreme stress in the market, there can often be a dislocation in price. This is between the actual value of a stock and the fair value of it. If you can buy a stock that has been oversold now, then when the market calms down, you should see the price rally back to a fair value.
With that in mind, take a look at these sectors. I think you should be looking to them for your investments in this stock market crash.
The impact of the coronavirus means a lot of consumers don’t want to leave their homes, so we’ve seen hoarding of food and household staples. Many supermarkets are seeing empty shelves with tinned and dried food flying off the shelves. I’m not saying we should invest on such short-term madness. But the recent panic-buying shows how important supermarkets are to our lives in good times and bad. For supermarkets such as J Sainsbury and Morrisons, the buying frenzy has been a large boost for operations.
If we see the situation continue for the next month, earnings for major chains such as the ones mentioned above should be very strong. But aside from short-term frenzies, buying-in now is also a fairly-low risk investment. Consider the two outcomes from here. Either the situation gets worse, in which case the goods provided by supermarkets will be in demand even more. Or the situation subsides, and normal trading resumes.
As far as normal trading goes, Sainsbury’s 2019 interim results showed a 0.2% fall in sales year-on-year. Nothing drastic, and for a firm that has operated for over 100 years, maintaining market position is the key aim instead of double-digit sales growth. With the stock market crash, Sainsbury’s shares are down 16% since early March and Morrisons down 12%. So buying shares in a supermarket now is unlikely to lose you money come the recovery, in my opinion.
Another defensive sector that’s worth considering to buy at bargain prices during a crash is healthcare. It’s a fairly wide category, but think of the likes of GlaxoSmithKline and Astrazeneca. During a market crash, the price elasticity of demand for the drugs supplied is very low. This is because the majority of the products healthcare firms manufacture are a necessity for many of us.
Added to this is the current situation with the coronavirus. No doubt firms like GSK and Astrazeneca are working hard to produce a vaccine to bring to market. While I’m not suggesting investors try to profit from the virus, one of the firms eventually could have a successful vaccine. If so, the goodwill associated from this, along with the financial benefit would be significant.
In the meantime, investors buying-in to the shares during the stock market crash can enjoy a healthy dividend yield — for example GSK currently offers 5.7%.
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Jonathan Smith does not own shares in any firms mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.