How are you feeling this morning?
If you’ve opened this email, probably not great.
Anyone clicking on an email with the subject line “Corona-crash, oil prices and your portfolio” is nervous about their savings, pensions and investments.
As we all should be.
First, the coronavirus threatened demand and the global supply chain, and now the oil price is collapsing to add to the panic.
If you bought the dip at the beginning of last week, you’re already seeing some chunky losses.
It’s stressful. It’s the most stressful thing we face in all the process of investing our savings and pensions. A slight reduction in gains is fine, but losses? We humans really aren’t great at handling those, knowing we’d be better off if we’d done nothing at all.
And with the FTSE 100 opening this morning in bear market territory, 20% off its peak only a few weeks ago, it’s something that many people might be dealing with today.
There is one absolute mistake to avoid though, and it’s selling late.
Investing is about buying low and selling high, but that’s very hard to do. Buying medium and selling a bit higher is often the best we can hope for.
But in many cases, especially in times like these, buying high and selling low becomes the norm, because we humans are simply not built for this. Our emotions, built to fear predators in the forest that we could not see, exaggerate and panic. Better safe than sorry; at least leave this murky forest alive. When we cannot see, our brains go through these phases to keep us safe.
But in the modern world, this psychological development is a weakness, because in most of our lives the worst we have to fear is a busy commute, getting soaked, a hiccough in our relationship or a mistake at work.
In investing, crushing those emotions and doing the opposite is almost always the best course of action, but we must fight our brains to do so. That’s why algorithms and systems are often much better at investing than we are – they can remove emotion and help us to buy and sell at the right times.
In this case, our brains are beginning to tell us to panic, to sell, and these calls will get stronger the further our investments fall.
But in investing, one must panic early, or not at all. Market corrections like this one, however big, will ultimately correct once more into positive territory, and the cardinal sin is to ride the decline, panic late and sell, and then miss the bounce.
(Unless of course you think you’ve identified that one of your holdings could go bankrupt as a result of this – I’ll point you in the direction of a few possible examples lower down.)
Instead, now is the time to start looking for bargains. No need to start buying yet, and certainly don’t be indiscriminate. But it’s worth thinking about how the world will change because of all this, and which companies that might survive and even thrive which are looking cheap because others are panicking for you.
Let me give you an example.
The weekend that changed the world
Today does not mark the end of the world. Coronavirus equates roughly to the flu. It’s much more contagious yes, but every narrative has a cycle and a peak, and this too will pass. Vaccines will be found, immune systems bolstered and data studied.
For example, the normal flu kills 300,000 to 650,000 people each year, according to the World Health Organisation. New cases of coronavirus infections peaked in China weeks ago, with around 110,000 people infected so far and 2-3% of those reported cases dying.
So I reiterate, the panic over the coronavirus will pass. It’s an overreaction for now, but as investors it’s the reaction we must pay attention to. And the reaction has been severe. Hundreds of millions of people quarantined in multiple countries, total loss of supply chain flow, work stopping, demand falling, and mindsets changing.
Things will change, and this weekend gives one clue as to how the world might have shifted as a result.
The really big news regarding the markets this morning was not the virus, but oil.
Prices fell 20-25% over the weekend as Russia and Saudi Arabia fell out, cut prices and announced that three years of restricted supply would soon be flooding the markets.
Prices around $30 a barrel were seen early on Monday morning, and that’s a more than 50% decline since the end of last year.
Meanwhile, slightly more under the radar, the EU made what many industry insiders felt was the most important announcement of the weekend, given what was going on.
While OPEC fall apart, and oil prices and stocks collapsed, the EU announced a continent-wide hydrogen strategy. In its wake, a billionaire natural gas chief exec announced he would be shifting his entire business to become a hydrogen supplier, within the next decade.
This is enormous.
It feels like as close as we will ever see to a defined turning point in the global transition away from fossil fuels and towards a clean, sustainable future. From oil tanks and out of the fire emerges the phoenix of hydrogen. (Obviously it’s far more complicated than that – lower oil prices weaken the economic case for renewables in the short term at least, but I’m more thinking of this as symbolic, and that it may be looked back on as a defining moment in the transition.)
The wave of good news emanating from the renewables, clean tech and hydrogen sectors over the last 2-3 years has been unrelenting, hence their impressive stockmarket performances.
Many companies in those sectors have massively outperformed indexes, benchmarks and their fossil fuel peers most of all. When thinking about how the virus and oil shock will change how the world looks in the coming years, there is nowhere to start but here.
I would definitely be actively trying to learn more about the energy transition from fossil fuels to renewables, petrol vehicles to electric vehicles, and the many uses of hydrogen in cleaning up industry, transport, heating and more.
I would also be double-checking any of my fossil fuel holdings.
While at this point the classic blue-chip oil majors might be bargains given their massive price drops, their positive, predictable cash flows, long histories and (now massively improved) dividend yields, companies in the US shale oil industry are now very much at risk.
Most are very heavily in debt, producing negative cash flow and teetering on the edge. Bankruptcies have been rife in the sector as Wall Street’s lenders have begun to lose patience and stopped funding losing projects.
They are the target of the price war, and many of the lower quality, less efficient and cash-flow negative companies will come under massive strain as a result of this oil shock.
The Kipling trade
If you can keep your head and not panic now, while everyone else is losing theirs, there is some serious thinking to be done about the next opportunities. This is regardless of whether we are at the lowest moment of a brief panic or a longer decline, bear market or crash. Either way, I think a huge number of amazing bargains and opportunities are beginning to emerge in renewable/clean energy.
Maybe not today, maybe not this week or this month – timing is not the issue here and it’s probably not possible either.
But it’s worth having a think about all this, building a bit of a wish list, and starting to dip the toe back in the churning seas once prices start to look really attractive.
And if possible, get help from a friendly algorithm that can help with timing, because we are all at sea right now.
All the best for now,
Investment Research Analyst, Southbank Investment Research