The Covid-19 Pandemic Has Led To A Boom In DIY-Investing But What Are The Lessons Learned So Far?written by Bella Palmer
The UK’s major online stock broking and investment platforms have reported record numbers of new accounts being opened over 2020. Many have gotten off to a great start, benefitting from the strong stock market rebound from March lows when coronavirus fears sparked a sell-off.
The London Stock Market has, however, lagged behind Wall Street, which has staged an almost full recovery, at least on the level of the major indices, fuelled by surging gains recorded by the biggest technology stocks such as Apple, Amazon, Alphabet (Google), Facebook, Microsoft and Netflix. Here, the benchmark FTSE 100 index of the 100 largest companies listed on the stock exchange had recovered by 21% from March lows by last week’s close. But remained 18% of pre-coronavirus sell-off levels.
The UK market, its recovery slowed down by a lack of major technology stocks and Brexit uncertainty still a factor, is now attracting glances from international fund managers hunting for bargains. The hope is that when brighter skies do appear on the horizon, London-listed companies still have some recovery bounce left in them. That could especially be the case for FTSE 100 stocks, which often earn a majority of their revenues abroad, rather than in the UK.
So, what lessons should new DIY investors draw from what’s happened so far during the pandemic, to keep their portfolios moving in the right direction? And what future factors that may influence stock market movements should be kept an eye on?
For new DIY investors, the current situation over the pandemic months means markets have been much more volatile than would normally be the case. If you started to invest in spring, you’ve lucked out if investments have been well diversified across the UK and bought international stocks or indices.
But gains since March have been an exception and thanks to the big stock market drop ahead of them. It won’t always be so easy. It’s important to start thinking about and analysing what’s been happening and why, to help inform future investment decisions.
Why Has The LSE Lagged Many Other Major Markets?
The first thing new investors will have noticed over the past several months is that the London Stock Market’s recovery has lagged that of many other major markets, especially the USA. But not only. As of the end of last week the benchmark indices in Japan, Germany, Hong Kong and France were respectively down just 1.8%, 2.4%, 9.4% and 15% from their February highs. All significantly less than the FTSE 100’s 21%.
We’ve already briefly mentioned the two main reasons why London-listed stocks have bounced back less strongly than peers elsewhere but they deserve some detail. London lacks big technology stocks and it is exactly those stocks that have driven the rebound and rally on Wall Street. Strip out the likes of Microsoft, Apple and the rest of the ‘big tech’ line-up and U.S. stocks are also still down 4% overall. It’s still less than the major UK indices but illustrative.
Sectors that have heavy weightings on the FTSE 100 are also among those worst hit by the pandemic. Banks, miners, travel and tourism, energy and hospitality, for example. EasyJet has dropped out of the FTSE 100 twice in 15 months, cruise-operator Carnival has been hammered and dropped out in June and BA-owner International Consolidated Airlines has seen its value halve in 2020, while Rolls-Royce, which generates much of its revenues from selling engines to commercial airlines, has also tanked. BP and Shell, which were the two largest companies on the London Stock Exchange before oil prices tanked, have also seen their values plummet.
There is also a Brexit-tax being priced in by markets weighing on London-listed stocks, which is also hitting companies that don’t generate a big part of their income in the UK, but operate very internationally. Examples include consumer staples giant Unilever and drinks company Diageo. Both have revenues that have held up well over recent months but are probably valued more modestly than had they been listed on another international exchange, as asset managers give Brexit UK the cold shoulder.
Some companies may have sustained long term or even irreparable damage as a result of lost revenues thanks to the pandemic. But those that recover, along with their sectors, could offer very good long-term value. Potentially better than peers elsewhere in the world not also contending with Brexit putting off investors.
What’s Driven The Bounce Back And Will It Continue?
The MSCI World index, which is a broad based index including companies from developed stock markets internationally, is currently 9% up on where it was last year. It’s hard to argue that, overall, the world’s economy and revenues and profit outlook of its major companies across sectors, are improved on where they were 12 months ago. So why is the index up and can it last?
The most influential factor seems to be the huge levels of monetary and fiscal stimulus injected into markets by central banks and governments. Printing money and lowering interest rates are bad for savers but good for stock markets. With no returns to be made on debt or cash savings, money is pouring into equities. That saw the Covid-19 bear market last for just 66 days – one of the shortest ever. The average of the last 10 bear markets is 356 days.
Investors are valuing stocks, or many stocks, on their potential once the pandemic is behind us. Not current revenues and profits. That could be risky if optimism falters or earnings fail to match up to expectations in the quarters ahead. But it’s also an opportunity to look for value stocks the optimism has neglected more than others.
Where To Look?
There’s a feeling stocks that have performed well over the pandemic, examples include fantasy role-play games company Games Workshop and Playtech, the online gaming and casinos company which are up 136% and 162% respectively, are being over-rewarded by markets. Others, in sectors that have been hit worst, may be being over-punished.
With the UK market weighed down by having more companies than most developed market rivals in the suffering sectors, investing in cheap index trackers like FTSE 100 or FTSE All-Share trackers, could be a decent longer-term bet to catch the upside when this all blows over. But expect further volatility in the months to come, especially in the near term with markets suffering a crisis of confidence this week due to a second wave of the virus gathering pace and new lockdown restrictions.
Don’t try to time the market though, which is a high-risk strategy. Drip feeding investments in monthly or weekly instalments gives you the best chance of catching as much of the upside as possible without taking on too much risk.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.