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The COVID-19 pandemic has impacted most countries, businesses, workers and households. Unsurprisingly, investors have not been spared, with most major stock markets, including the S&P 500 and Straits Times Index (STI), seeing a spike in volatility along with a major decline in price.
As investors, we have little certainty on when this global pandemic will end, or whether things will become worse, before it gets better.
This leads to another important question; do we continue investing in the stock market during this period? Or should we take a break for the time being, while we wait for the markets to recover?
With Fear Comes Opportunity
While some investors may prefer to wait on the sidelines, one can also consider to continue investing even during downturns, so that you capture the upswings when the market eventually recover.
While major recessions have occurred in the past (1997 Asian Financial Crisis, 2003 SARS, 2008 Global Financial Crisis) leading to stock market crashes, it has always recovered and surpassed previous peaks.
Research by Dimensional shows that stocks delivered strong returns over one-year, three-year and five-year periods following steep market declines. These returns generally also outperformed the average return that an investor can gain in a typical year.
While a downturn may seem like the worst time to invest, evidence based on historical performance shows otherwise – depicting that it will bounce back even stronger than before once the crisis is over.
Behind Every Investment Is An Actual Business
Whether we continue to invest during good or bad times, investors should always remember that behind every stock investment is an actual business which has its own products, services, employees and customers.
Businesses can be impacted by black swan events like COVID-19. Often, the magnitude of its impact on businesses is both unknown and unpredictable. An example would be just how hard-hit tourism-related businesses such as airlines and hotels are facing now. This make investing during a downturn tricky, and it’s also the reason why most stocks would see its price decline.
When we invest in a stock, we need to be confident that its business can overcome the downturn. If we can choose the right stocks to invest in, we can potentially earn a good return on our investment.
As investors, we want to invest in the strong companies with the staying power to bounce back.
Recessions Are A Great Time To Invest In Strong Companies
During a recession, even companies that are resilient and likely to survive will see its price decline. This is simply the nature of the stock market. When market sentiments are weak, stock prices will fall across the board.
Rather than worry about whether we should invest during this downturn, the more important question is this: Which companies should we invest in?
After identifying these strong companies that we want to invest in, going in during a downturn means paying less for the stocks of these quality companies, as compared to investing in them during a bull market.
Similarly, while it might seem attractive to invest in companies after their stock price have been battered, we cannot do it blindly as some companies may never recover.
Think of it this way; there is never a bad time to invest in strong companies. Likewise, there is never a good time to invest in bad companies. No matter what, we want to choose strong companies with robust business models and balance sheets. A recession shouldn’t change that simply because a company’s stock price becomes irresistible.
A Recession May Make It Easier To Spot Good Companies
During times of economic growth when most businesses are profitable, it can be difficult to spot good companies. Merely focusing on companies that are making the highest profits may also mean missing out well-run businesses that do not need to take excessive risks.
However, during a recession, the focus changes. Instead of looking at profitability, investors start to look for companies that are resilient. These are companies that have strong cash flow, a less cyclical business, and for those with cyclical business, the ability to come out of recession in a stronger position compared to their peers.
It’s also a misconception to think that only large-cap or multinational companies can weather recessions. Both large-cap companies and small-cap companies can have businesses that are resilient. At the same time, no company, big or small, is entirely immune to the impact of a recession. In fact, the bigger they are, the harder they may sometimes fall.
An unfortunate example of a big local company that has been hit hard by this recession is Singapore Airlines (SIA), our country’s national carrier. Since March 2020, SIA share price has tumbled from 5.742 (2 March) to 3.76 (27 May), or a decline of about 41% (note, this already takes into consideration the lower ex-rights price)
Similar to other airlines and travel-related companies, SIA business has naturally been impacted heavily due to the curb of global travel.
On the other hand, a smaller-cap local company such as Sheng Siong have seen their share price rise significantly over the past months. Since the start of the year, Sheng Siong stock price have climbed from 1.24 (31 Dec 2019) to 1.55 (27 May 2020), an increase of 25%. In March, share price did declined to 1.02 (19 March) in tandem with the market. However, it has since recovered quickly due to higher revenue arising from a greater level of grocery shopping.
Our point here isn’t to say that SIA is not a strong company and that you should invest in Sheng Siong instead. We are not making a recommendation.
Rather, what we are saying is that investors shouldn’t generalise the strength of a company based purely on just its size. Larger-cap stocks are not always safer as compared to smaller-cap stocks. Instead, we should invest in a company because we are confident of its business, and its ability to sustain itself through both good and bad times.
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If you are looking to make investments on the Singapore Exchange (SGX), Investor-One, a website operated by ShareInvestor, is a valuable resource that you should have on your reading list. The website is dedicated to help investors find information on stocks listed on the SGX.
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