Coronavirus: Prepare for more pain on the sharemarket
Aussie shares have recovered some of their heavy losses of early last week, but unfolding economic news should sound a warning bell for investors to be careful and stick to their long-term plans.
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Negative oil prices for the first time in history are a signal that a new phase of downward pressure on Aussie shares is here.
Investors are being urged to tread carefully, focus on quality shares and stick to their long-term strategy amid fears that stocks may sink back to their lows plumbed last month.
CMC Markets and Stockbroking chief market strategist Michael McCarthy said shares were likely to suffer a “second leg down”.
The first stockmarket plunge in February and March was a reaction to the rapid spread of coronavirus. “Now we are getting evidence of the economic impact,” Mr McCarthy said.
“This is a time for extreme caution among investors.”
Last week the price of crude oil plunged below minus-$US35 a barrel as COVID-19 slashed global demand.
Dwindling storage capacity for oil meant sellers had to pay buyers to take barrels of oil off their hands.
“That extraordinary oil price – in 35 years of markets I have never seen that,” Mr McCarthy said.
“There’s only so many barrels of oil you can put in your backyard.”
Mr McCarthy said investors should stick to their long-term strategy, which should allow for sharp falls as well as sharp rises.
Patience was also important, he said. “Everyone was feeling buoyant (in recent weeks) but we are still going to see economic damage despite the better picture around virus containment,” he said.
William Buck private office senior adviser Andrew Bradley said there was no way to know when the market reached its bottom.
“It’s only confirmed after the fact,” he said.
“Once the bottom arrives there are usually few sellers left to sell.
“Key signals that indicate it’s time to commence your buying program are when investor psychology is negative and valuation standards are ignored, causing panicked investors to create bargains by selling despite low prices.”
Mr Bradley said investment plans for the eventual recovery should involve six to 12 months of targeted buying via a series of smaller purchases.
A new report by global investment group VanEck has found that investors who stick with quality companies – those with low debt and stable profit growth – should do better in volatile times.
It found that during previous periods of extreme volatility, such as the global financial crisis, quality outperformed the overall market.
VanEck head of Asia Pacific Arian Neiron said quality companies still suffered during sharp downturns but were hit less severely than the broader market.
“They lose less and recover faster as their cash flows are more likely to survive a downturn than companies with high debt levels and low return on equity,” he said.
Originally published as Coronavirus: Prepare for more pain on the sharemarket