Markets have been fluctuating on both sides of the Atlantic since the Monday market crash amid the coronavirus outbreak, plummeting oil prices, and restrictions imposed by countries to stem the spread of COVID-19. Stocks again plunged on Thursday after the drastic slide on 9 March, however, on Friday the global sell-off eased a bit helping global stocks to pull back.
Tensions Cool in China
Folker Hellmeyer, the chief analyst at Solvecon Invest GmbH, highlights the coronavirus has had an "exogenous" effect on stock exchanges but that this has nothing in common with "endogenous crises", which are caused by general flaws in financial structures or the economy. Therefore, there is a massive difference between the current market crash and the global financial crisis that shattered the world in 2008.
"This exogenous crisis is currently leading to a reassessment because nobody can really deal with the COVID-19 virus. There is no knowledge of it. But there is experience gained by China: after an approximately six-week increase in the crisis, tensions have subsided. We see it in the case of new infections and the number of recoveries. One can also project this to the rest of the world", Hellmeyer elaborates.
The analyst expects that the tensions could ease up in the next seven days, and the markets would then react accordingly. For instance, in China, the CSI 300 and Shanghai Composite indices reached their maximum annual levels on 4 March.
Hold Your Stocks
Hellmeyer advises against selling stocks that have dividend yields of between 4% and 7% in accordance with a conservative investment model and judging from the available data and historical record of such virus outbreaks.
Interest rates have been reduced worldwide and that is the "discounting factor" for all other asset classes. Situations, like the present one, when investment prospects appear increasingly vague are rare. Therefore, according to Hellmeyer, one should hold on to shares and bide his/her time.
"We see that measures are being taken around the world to maintain market performance", the analyst points out. "These measures are aimed at supporting healthy structures: state loan guarantees are given and short-term loans are provided by development banks. These steps are right".
The economist also draws attention to mid-term measures and "catch-up" effects which could influence the global economy in the following months, in the second half of 2020 and also in 2021. He foresees that the situation will improve in the second half of the year at the latest and that it will be accompanied by low-interest rates which will encourage equity investments.
Attractive Time for New Investors
For the aforementioned reasons, the expert considers the current situation to be extremely attractive for investors who have medium-term investment planning. Russia is a good example, according to him.
Russian stocks have been sold off aggressively because of the oil price frictions with Saudi Arabia. The RTS index has dropped from over 1,600 to 1,100 points and the price-earnings ratio in Russia is in the range of five and the price-to-book value ratio is estimated at 70%. At the same time, dividend yields are at 9%. Under these circumstances the economist considers purchases to be "absolutely effective" for investors.
On the other hand, speculators will face certain difficulties: any news could move quotes either up or down by a couple hundred points.
"In January, we saw quotes reaching historic highs", Hellmeyer says. "Then we were glad that we bought at the level of 13,000, and the DAX index amounted to 13,700. Now you can buy at 11,000, and the buyers got cold feet. The world will keep spinning even after the outbreak of the coronavirus. China has already recovered from the blow. The number of recovered patients is growing and exceeding the number of newly infected. 7.7 billion people should receive basic security. After an outbreak of coronavirus the world's not going to end".
There will also be certain changes, according to the economist. He foresees that a number of industries including tourism and passenger transportation – for example, Lufthansa – will "perform below average" for a period of time.
Due to the low prices for aviation kerosene, Lufthansa looks very attractive, but these sectors are the most affected by the outbreak of coronavirus. The analyst, therefore, sees greater potential in such areas as the means of production, industry, and other cyclical values.
"In my opinion, there is definitely more potential there in the short term than in the industries which are likely to be partially impacted by the crisis in their business operations", he concludes.