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Investing during COVID-19 and other Black Swan events

Felicia Tan
Felicia Tan • 5 min read
Investing during COVID-19 and other Black Swan events
How do you protect your portfolio during uncertain times like these? It really depends on the following factors.
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SINGAPORE (Mar 3): Knowing when to enter and exit the market isn’t easy. Beyond doing your research, whether you ultimately make a profit or not, sometimes depends on the timing of events. This is especially so during unexpected occurrences, or what we call Black Swan events.

According to Nicholas Nassim Taleb, an author, scholar, and former options trader and risk analyst, Black Swan events are unexpected events that have an extreme impact in our world, and are thought to have been able to be predicted in hindsight.

When news of COVID-19 first surfaced in December 2019, no one could accurately predict its impact, or how long it would last.

See also: Are investors overreacting to COVID-19?

However, its ramifications on the world’s public health, the economy, and the markets, continue to be keenly felt.

How do you protect your portfolio during uncertain times like these, you ask? It really depends on the following factors.

See also: OCBC Securities launches Singapore’s first AI stock-picker tool

Having a balanced portfolio

With or without a Black Swan event, it is important to diversify your portfolio. A diversified or balanced portfolio helps minimise the risk of you losing as much money as possible. A basic balanced portfolio includes stocks, bonds, and ETFs, which are made up of a variety of stocks or bonds from several companies.

See also: Congratulations, your stock is now a privatisation target but here’s the twist

Commodities such as gold, are also a good asset to have.

According to Howie Lee, an economist at OCBC Bank, “Gold is an important diversification asset in any portfolio. It should help to reduce volatility within your portfolio by hedging against unforeseen events.”

“Gold is a hedge against uncertainty… When fear sentiment increases; including fear of recession, war, virus or [a] pandemic [like COVID-19], people rush to buy gold,” he adds.

See also: What to do during a stock market crash

Chua Boon Siang, an equities specialist at Phillip Securities agrees. “Investors tend to find refuge in safe-haven investments during a crash. Precious metals such as gold and silver tend to outperform during periods of uncertainty," he says.

"Another safe-haven asset to consider, is bonds, as they can generate a steady flow of income through coupon payments. Investors can also look at adjusting a portion of their portfolio to stocks that are ‘defensive’ or likely to benefit from policy measures arising to counter COVID-19," he adds.

For more stories about where money flows, click here for Capital Section

Know where to put your money in

During a pandemic like COVID-19, the healthcare industry, especially companies that specialise in vaccines, face masks, and other medical supplies, are likely to be positively affected.

“Domestically defensive sectors including telecommunications, e-commerce, and online entertainment (stand to benefit). Healthcare stocks should also see stronger growth,” says Carmen Lee, head of OCBC Investment Research.

See also: The anatomy of market corrections.

DBS’s Chief Investment Office research agrees. According to their report, the research team believes “e-Commerce will continue to thrive in this turbulent time… While the overall impact on forward earnings has yet to be quantified, the tone is toward near-term cautiousness. Against this backdrop, we anticipate e-Commerce companies to emerge as mid-to-long term thematic winners, supported by the structural trend of the world transforming into a digital economy.”

Conversely, due to the effects of COVID-19, where people are less likely to leave their homes or head overseas, tourism, retail, as well as food and beverage-focused businesses may be negatively affected.

The way OCBC’s Lee sees it, many of these sectors are now in “negative territory”.

“Key Asian equity indices have given up gains earlier in the year,” she says. “Tourism, hospitality, and the retail industries bore the brunt of the selling pressure. This fall out could spread to other segments of the economy.”

“The outbreak of COVID-19 has dealt a direct blow to the tourism sector, which was on the verge of taking off during the Lunar New Year period,” DBS adds. “Travel activities have come to a standstill, with flights cancelled and tour groups withdrawn. Tourism-related data have yet to reflect the impact of the COVID-19 outbreak and we anticipate downside to persist in the coming quarters.”

Don’t get too caught up in trends though. DBS’s Chief Investment Officer Hou Wey Fook advises investors to take “selective positions” in “long-term thematic plays”.

“We believe that this viral outbreak is transitory and has no bearing on long-term secular trends. Stay positive on US e-Commerce, Health Care, and Millennial consumption,” Hou says.

Read the financials

When in doubt, go back to the basics. Reading a company’s financial statements will allow you to determine the company’s financial health, and ascertain its fair value. In doing so, you should be able to identify which companies are likely to emerge out of this crisis intact.

Phillip Securities’ Chua recommends investors to "avoid certain impacted industries like tourism, aviation and oil until we see with certainty that the market is recovering".

"One can also look at companies with a healthy cash flow balance, as these companies will have a higher capacity to ride out during this business turmoil,” he says.

Looking for stocks to invest in? Examine these metrics to determine whether an investment is safe enough, and see these seven strategies for investing at market peaks.

For more stories on investing 101, click here. For more news and investment insights, see our print edition here.

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