Discussion Paper – what do we do now? Covid-19 implications

By Cliff Weight, ShareSoc Director

This is a complex area. It would be good to hear your views and ideas. Please add them via the comments box below this blog. Please note I am not qualified to give investment advice, and nothing in this blog constitutes advice. What follows are my views which will no doubt change as more data becomes available. This discussion paper is one of a series of White Papers and Discussion Papers which aim to debate issues of relevance to ShareSoc members.

The implications of the new coronavirus Covid-19 are beginning to become evident. Key points?

1. Try to stay fit and healthy. Practice safe distancing (>2metres) when you go out. Minimise contact with those who might have Covid-19 or those who have been in contact with people who might have Covid-19.
2. Cash is King. Make sure you have a good cash buffer.
3. Do something good every day.
4. Review your investments.
5. Don’t panic! Think through what is best for you rationally. Don’t listen to your emotions.

In a bit more detail…

1. Try to stay fit and healthy.

Practice safe distancing (>2metres) when you go out. Minimise contact with those who might have have Covid-19 or those who have been in contact with people who might have Covid-19.

There won’t be enough ventilators or hospital beds or doctors. They can’t make ventilators quick enough and it takes 7 years to train a doctor. Rough and ready hospitals in conference centres, former hotels and exhibition centres can be set up quickly. Wuhan made 3 new hospitals in 10 days and then rounded up the sick and left them there with minimal bare bones healthcare (hospitals or concentration camps?) Gory pictures of Italy and Spain are a sign of what will occur in the UK, absent a miracle.

Older and unfit people are more likely to die of Covid-19. Try to do as much exercise as you can. Aerobic exercise will increase your lung capacity, which you may need.

My financial adviser, 20 years ago, gave me the best ever piece of advice – “Send me 2 postcards in the winter from 2 hot and sunny places. That way you will stay healthy and I will get my fees for longer!” Obviously foreign travel is out for the present but the sentiment to stay healthy remains.

2. Cash is King. Make sure you have a good cash buffer.

Dividends will start to dry up. I got £635 from Shell and £267 from Unilever today. My VCTs should continue to pay dividends. But for many companies the only prudent thing to do is is preserve cash. Share Buy Backs will become a dirty word. Finance Directors should not expect public sympathy if they ask for a government bailout having paid large dividends and/or returned cash to investors via share buy backs. EasyJet and Heathrow Airport please note!

Cash in your portfolio is (in effect) an option to short the market, as it allows you to buy in at a lower price if the market declines. Without cash you cannot do so. Cash enables you to buy bargains. No cash means you cannot afford to buy the bargains.

I have about 15% of my investments in cash. I wish I had more.

Governments around the world are printing cash. Short term they are worried about a liquidity crunch. This aspect is akin to the 2008 financial crisis (re-read Too Big to Fail which explains what happened and why). Companies will start hoarding their cash. If the overnight market seizes up, god help us. So far central banks seem to be on top of this. Longer term more cash in the system means more inflation. So far, index linked gilts have not surged, which suggest the market does not agree with me about inflation. However when the King of Spain found all that silver in Peru in the sixteenth century he was delighted at his new wealth- not realising that 50 years later the price of bread would be twice as high (re-read The Ascent of Money for more insights). History teaches us that inflation is very bad for the poor, whilst the rich find ways to preserve their wealth. Post 2008 the very rich did very well, the middle classes did quite poorly and the poor did not get to share fairly in the economic recovery when it happened and many suffered badly when the crash happened.

Deciding when to invest and how much of your cash buffer is a crucial decision. Buffett said be greedy when others are fearful and be fearful when others are greedy. I won’t time it right. I think I will make investments in 3 or 4 phases, not all in one go. That way I won’t get it completely wrong. And if the market does completely bomb, I will still have some cash left.

My financial outgoings are much reduced as there is little to spend money on at present. My defined benefit pensions from Woolworths and Mercer and tax free dividend income from VCTs (if they continue)  should cover most of my bills in this safe distancing and limited interaction world.

My nephew (age 27) was about to buy his first house. I told him not to. There is a good chance house prices will be 25% or more lower in 6 months time. House sales will dry up. No-one in their right senses will buy a house now. Some who have paid a deposit will give up their deposit and save them having to complete. Many people will not know yet if there will be a V or U shaped recession and when (or indeed if) the world economy will bounce back to current levels and resume growth. Such people will be fearful of their future income and will not want to buy houses. So house sales will dry up and with less demand the only way to balance supply and demand is lower prices and halting building. The current high house prices (as multiple of average incomes) highlights a bubble and this bubble will burst. Today’s FT has an article on the impact on the buy to let market. My nephew is renting and has to renew in one month’s time. He is going to offer to pay £3,000 in rent for the next 6 months rather than the current rate of £4,500. I think this is a win-win for him and the landlord – who otherwise might have an empty flat and no cash for the next six months. Expect many more such stories. Cash is King!

3. Do something good every day.

We have just paid our cleaning lady, in advance, for the next 12 weeks and asked her not to come and visit us for 12 weeks. We paid her 100%, not 80%.

It is not just about your physical health. Your mental health is important too. Be positive emotionally. Don’t let this get you down. My garden is going to look its best for years. 🙂 ( smilie face)

4. Review your investments.

My approach is both top down and bottom up.

Top down, I think about asset allocation. How much in cash and how much in each sector. Cash I discussed above.

Sectors.

I have always avoided tobacco (tobacco kills people), guns and defence (they kill people).

I sold Berkeley Homes and Persimmon some time ago having booked very good profits. I sold Barratt Homes the other day and don’t have any building shares, for the reason that house prices and the volume of transactions will crash. I have some building infrastructure companies as long term these will be needed in the recovery.

Travel companies should be avoided. Flights have almost stopped, so income must too, but many costs remain. They will be leaking cash. There are cries for a bailout, which government should resist. Lessons about overly high dividends, share buy backs and excessive leverage need to be learnt.

Hotels (ditto as for travel companies).

Pubs and retail. Pub income will dry up for weeks. Many costs will continue. Don’t expect a full recovery. Many will go into administration. Many retailers already have. Exceptions are Amazon (hired 100,000 extra workers), Tesco, etc.

We will still need the basics of life, air, water, heating, electric, food, wine, pharmaceuticals, food retailers, food manufacturers, wifi, broadband, etc.

Working from home will be transformational. There will be a long term trend for less travel. (Cocooning will increase: re-read MegaTrends, a 1990 classic.)

I have been long on oil and short on miners and banks in my portfolio. So I have lost lots of money on my BP and Shell shares. I bought a small position in Anglo American recently (which is showing a loss) but may buy some more. I think they have enough cash to ride out the storm and the share price will recover when the world does. Ditto BHP.

I am very underweight banks and have sold some RBS even at these depressed prices. If another bank bailout is needed then bank shareholders will be decimated (again). IFRS9 adds complexity, but does not reduce the risks in this sector. Announcement of delays for stress tests do not reassure me. Banks should ditch dividends, buybacks and bonuses. $30 million pay of Goldman Sachs CEO sends the wrong message. It is time for Responsible Remuneration.

I have not had time to form a view about insurance companies.

I expect the price of fine wine to decrease and even if it does not I will buy some. Life is too short to drink bad wine! The old maxim is sadly too true, but we might as well enjoy it whilst we can.

My “fun portfolio” of investments in small companies has been decimated. Fortunately Haynes Publishing and Sirius Minerals were taken over and I will/ have received cash for these. I sold three quarters of my Yolo shares in December (now renamed as Similar). And I sold my shares in Avation (avoid airlines and anything with lots of debt). I sold my remaining IQE stake at 57p in August 2019 and it has now reduced to 21p, but it is still 5.34% shorted (so that is a win of sorts). Lidco went up 30% one day (it makes heart monitors) but has then fallen back. Mostly my “fun” portfolio is a sea of red. There will be some opportunities to increase my stakes in some of these companies, which I now much better understand.

5. Don’t panic!

Think through what is best for you rationally. Don’t listen to your emotions.

There is a comments box below. Please add yours. I hope you found my comments of interest. My guess is you will learn more from the comments of others. Please feel free to give your view, no matter how expert or not you consider yourself in investing.