We live in a time of uncertainty. Macroeconomic indicators suggest a recession, leading FTSE 100 investors to wonder what to buy. It is a highly important question since you could either make or break your wealth during this COVID-19 crisis.
The current downturn is the sharpest one on record. The unemployment rate and contraction of the GDP rate are extremely high. Many highly indebted businesses will probably go bankrupt because of their falling cash inflows. The consumer spending levels will remain under pressure for some time. Economists and epidemiologists debate over how long this crisis will last. But either way the outlook seems to be grim.
However, it could also be seen as an investment opportunity. But it is essential to choose potential stocks carefully.
FTSE 100 company to avoid
Many economies are starting to open up after the COVID-19 lockdown. Many businesses are also starting to operate, more or less as usual. However, airlines, tour operators, and hotels may be the last companies to start working as usual. The summer of 2020 will definitely be a crisis for the industries mentioned above.
The most prominent airline company in the FTSE 100 is IAG (LSE:IAG). Even though the lockdown measures will end sooner or later, the company’s sales revenue will probably take several years to recover. This is because a recession always forces consumers to reduce their spending on non-essential goods and services. And air travel is one of them. This long-lasting crisis for the industry will, according to some experts, only likely end by 2023.
Meanwhile, IAG CEO Alex Cruz has warned that no state aid is coming for the company. So, it was forced to make more than a quarter of its workforce redundant. It might be true that the company will survive without the government’s rescue package. However, the company will shrink in size. It means that sales revenues and profits will remain quite low. As concerns shareholders, they might not receive dividends for years. Even though I think that betting on IAG might turn out to be highly profitable for brave long-term investors, I’d prefer to buy less risky companies.
Companies to invest in
So, which companies should I buy? Well, in my view, given that interest rates are next to zero around the world, gold and silver miners might be a brilliant alternative. All depends on the investment horizon. The recession will not end tomorrow. Quite a lot of time is needed for macroeconomic indicators to get back to normal. The central banks’ ‘whatever it takes’ attitude suggests that the quantitative easing programmes and the record low interest rates are here to stay for a long time. This is really good for gold and silver prices because they tend to move higher when central banks decrease interest rates.
Even though I am bullish on gold and silver, I think that investing in mining companies might be a better alternative than buying the metals themselves. After all, they pay dividends, whereas physical commodities don’t. In my view, Fresnillo, a top Mexican silver producer, and Polymetal, a highly profitable gold miner based in Russia, might do a good job for investors. Both of them pay dividends and their shares move in the same direction as the commodities themselves.
Either way, I’d avoid risky companies like IAG and invest in FTSE 100 dividend payers instead.
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Anna Sokolidou has no positions in any of the companies mentioned in this article. The Motley Fool UK has recommended Fresnillo. 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.