The coronavirus crisis has plunged many stock markets worldwide into a downward spiral. The Dax, for example, fell by a good 15 percent since its high on February 19 in a very dynamic and rapid mini-crash. In the USA, the major indices fell by a similar amount, with the Dow Jones, for example, losing more than 4100 points within a few days. This corresponded to a loss of 14 percent.
Investors had not experienced such massive selling waves since the financial crisis. Investors around the world are worried and are asking themselves numerous questions:
- What’s next?
- What does this mean for their own money?
- Do sales make sense?
- How can you profit from the crisis?
- Is gold still a haven?
Here is a brief overview about how to make money during depression.
Further price falls threaten
After a sharp downward slide in the previous weeks, the markets initially calmed down with expectations that the US Federal Reserve could cut interest rates. However, when it did so on Tuesday outside of the regular schedule, this tore the markets down again.
Investors were skeptical that the Fed had not even waited until the regular meeting on March 15. “What if the Fed sees more risks than the markets,” writes Christian Scherrmann, an economist at the investment company DWS, in a recent assessment. The OECD is also sounding the alarm: if the coronavirus continues to spread, the eurozone could slide into recession. This would not remain without consequences for the markets.
Banks distinguishes between a base case and a worst-case scenario. In both cases, the downward slide would not yet be over but could end up being 20 or even 30 percent lower. For the Dax, that would mean From its high at 13,789 points; it would fall to 11,031 points if it fell 20 percent, and even to 9,652 points if it fell 30 percent.
However, it is also conceivable that the spring with warmer temperatures will keep the virus in check and that the number of illnesses and economic consequences will not get out of hand. Yesterday the indices recovered somewhat. Nevertheless: In any case, the virus should leave its mark on the balance sheets.
Sell or sit out?
Which strategy makes more sense depends on the investment horizon. If you are short-term oriented, you need to know that your portfolio could slide further into the red. If you think long-term, you can sit out the virus – or even buy it cheaper when the markets dive again.
However, it has been scientifically proven that market timing, i.e., the attempt to find the best time to get out and the best time to get in, can only succeed with lucky investors. Investors who need the money in the short term should, therefore, sell above all.
Hedging of the portfolio
If you are worried, you could hedge your portfolio with stop prices. To do this, you have to trigger a sell order for each position, but this is only realized at a specific, lower point. Put warrants are an alternative. They rise when the market falls, thus hedging the portfolio.
Broad indices that match the investment regions in the securities account are suitable as underlying here. However, hedging has its price: if the markets rise against expectations, the money is gone.
Losers of the Corona Crisis
Travel groups, airlines, hotel chains, cruise lines, and car rental companies have suffered most so far. However, mechanical engineering companies, car manufacturers, and pharmaceutical companies with suppliers from China are also severely affected. Some hotels and car rental companies in the USA are complaining about massive booking slumps. This year, the travel and mobility industry could be missing out on a larger part of the approximately 300 billion dollars that the Chinese spend each year on travel worldwide.
The rest of the world is also partly without mobility. Event companies and caterers are complaining about cancellations of three-quarters of their bookings, while car companies are suffering a drop in sales of up to 80 percent in China due to lower sales. Hotels in Asia are often empty or have meager occupancy rates.
All of this can be seen in the share prices: a 30 percent corona bounce since mid-February is weighing on Lufthansa shares, for example, and the situation is similar for other airlines. Since then, the share price of the Tui travel group has slumped by 40 percent. Many globally active companies have already cashed in their sales targets, for example, Microsoft, or are expecting a drop in profits, such as the world’s largest brewer AB Inbev, which includes brands like Budweiser or Stella Artois.
Many shares that have fallen sharply are suffering from a presumably temporary sales shock, which could calm down again in the further course of the year. Eleven of the 30 Dax shares and 20 of 50 stocks in the EuroStoxx 50 are now available at between 10 and 25 percent less than four weeks ago. MTU Engines, for example, a DAX-listed engine manufacturer, has fallen from 287 euros to 217 euros since January 24.
The shares of companies that have recently presented outstanding figures and do not see any negative impact from the coronavirus have also fallen sharply. This applies, for example, to the shares of reinsurer Munich Re. Nevertheless, share prices do not assess the status quo but the future – and thus include concerns of all kinds. All in all, however, shares are currently much cheaper than two or three weeks ago.
Implications for funds and ETFs
Since funds spread the risk over many shares, they are on average better protected than individual securities. Actively managed funds can also increase cash quotas and wait for a downward slide with more cash in the portfolio before re-entering at a lower price.
However, active funds also face the challenge of guessing the right time to re-enter the market. ETFs directly reflect market developments, and will, therefore, be involved in a downward slide as well as a possible return to rising prices.
Profiteers of the crisis
Energy values, in particular, are not very impressed by the coronavirus. RWE, for example, is the only company in the Dax that is in the black in the weekly review. Eon was also only moderately sold. The picture in the EuroStoxx 50 is similar: Iberdrola, one of the largest energy companies in Europe, as well as Enel, were among the companies that managed to survive the market turbulence best.
There has been a massive rise in the share prices of companies that produce the medical protective equipment now required worldwide. The shares of Alpha Pro-Tec, for example, a Canadian manufacturer of protective gear and masks, have exploded by 320 percent since February 12. Paul Hartmann AG, the parent company of Bode Chemie, the manufacturer of Sterillium, the most widely used disinfectant in German medicine, climbed from 290 to 334 euros within a week.
Pharmaceutical or biotech companies working on the development of vaccines are also among the crisis profiteers, for example, Novavax. The share price of the small US biotech company rose from 3.50 to 14.40 euros since 13th January until investors realized that many companies around the world were working on a COVID vaccine. As a result, the share price fell back to 9.85 euros.
The diagnostics specialist Qiagen, which has just started the worldwide delivery of coronavirus test kits, and pharmaceutical companies with potential drugs against the coronavirus, also clearly benefited. Roche, Abbeville, Johnson & Johnson and Gilead Sciences with Remdesivir, which has not yet been approved, have potentially useful drugs. The first clinical trials of Remdesivir are already underway, and Gilead’s share price is up a good 11% over the month.
Fund Savings Plans and Gold
For investors with fund savings plans, the crisis can also have positive aspects. Those who regularly invest fixed sums now receive more units for the same money because of the significant drop in prices. This means that by acting anti-cyclically, they reduce their average entry price.
A small share of the widespread crisis currency gold of about five percent of the fixed assets is usually considered sensible insurance. However, unlike equities, gold does not yield any regular returns and has recently hardly benefited at all from sales on the stock markets, but had already risen massively, by around 12 percent since the beginning of December. Nevertheless, the US investment bank Goldman Sachs assumes that the price of a troy ounce could rise from the current level of 1642 to up to $1800 as a result of the coronavirus insecurity.
Consequences for government bonds
By now, it may be too late for entry into government bonds. The yield on ten-year German government bonds has fallen since the beginning of the year from minus 0.187 to now minus 0.61 percent. This reflects a run by investors in the most important German government bond – and the expectation that the ECB could soon lower its negative deposit interest rate for banks again to minus 0.6 percent.
Yields on ten-year US bonds slumped to below one percent after the key interest rate cut in the USA, having been above 1.6 percent a fortnight ago. Conversely, prices rose sharply. Overall, bonds are therefore now extremely expensive.
Emerging markets as an alternative
The success of this strategy also depends on the individual investment horizon. Depending on the further spread of the coronavirus outside China, for example, in Brazil, where winter is about to begin, individual emerging markets could well come under pressure. However, the World Bank has just announced that it will quickly provide developing countries with an initial USD 12 billion in aid.
On the Chinese stock exchanges, the state has also intervened to provide support. In any case, the Shanghai A Index is back above its pre-crisis level. The Kospi, the leading index from South Korea, the second most severely affected country, is just nine percent lower. In India or Brazil, the negative signs are also much less pronounced than in Europe or the USA. Fund provider Franklin Templeton believes that downside risks in emerging markets could only exist in the concise term.
3 Opportunities that await you in the next recession:
1. Real Estate
What happens to the value of the real estate in a recession does it go up or down? It goes down, and when it goes down, everyone feels how about real estate?
Consumer confidence is at low, and remember home is only worth what someone’s willing to pay and when people are no longer ready to buy homes, especially if we have too many of them because a strong economy from fall the reaping season created too much opportunity. There’s a moratorium on buying people aren’t buying homes anymore.
We don’t need them. We were overbuilt. So there’s always a lag between supply and demand between population needs, and the number of homes that are available and so what’s exciting about that is while everyone else is terrified about real estate during a recession is actually what? It’s actually on sale.
So real estate goes on sale, right? In the last economy, in Phoenix and Vegas, and these are homes that had a value of 200,000; they had ballooned up to 300,000, and during the recession, they came all the way down to 80 or $100,000. Do you know what we call that? We request that on sale. And remember the population continues expanding even if we’re not building houses.
So real estate is one of the opportunities that you want to be waiting for in the next recession.
Business right now looks at the years, and the baby boomers are retiring in the history of humankind. This is the most massive wealth transfer we have ever seen before; there’s only one problem: The baby boomers only thirteen percent of them are going to sell their businesses, and eighty-seven percent of them are just going to let it go, and a lot of the Millennials don’t.
Even want them even though they should and so in business, we’ve got this most significant wealth transfer where a company is being handed off to the next generation. Still, because business owners don’t know what to do with those businesses, they’re going to let them go, and some of them are going to let them go for pennies.
So to take advantage of the recession of companies you’ve got to get with business brokers. You got to start headhunting businesses that have an excellent track record of being very successful. Still, the management team is retiring, and if someone doesn’t take it over, it’s going to go out, and there’s a huge opportunity to get businesses at a considerable discount.
3. Stock market
In a recession, the stock market drops and everyone’s lost confidence, but think about it like Google or Amazon or Tesla or even Apple. Have they lost thirty percent of their value, if the market goes down thirty percent? Are they intrinsically worth thirty percent less? No, that’s a measure of consumer confidence, and within 36 months historically, we always get back up now to our previous high, and we make a robust recovery, and then we move into our next time.
So all lost money comes back within a 36 month period of time historically. If you were ever going to enter the stock market, guess when you must to join the stock market after everything’s gone down.
You’ll probably be tempted to say, is that its bottom yet? You got to be in the game long term enough for that, to be worthwhile, I’m not the biggest fan of this. Still, I want to be impartial because it is an opportunity. A recession is the best of times, not the worst of times.