Second Lockdown – Invest To Win

Never before have we been so uncertain about the UK economy’s ability to pull through this pandemic. We know that it could if given the chance.

 

Over the summer, British companies with a fighting spirit reminiscent of the Blitz were more than capable of dusting themselves down, adapting, and coming out of lockdown strong.

 

But now the government is taking away freedoms again with another heavy round of lockdown measures set to cost the economy £250 million per day. It’s the first steps of Lockdown 2, and this time, it’s gonna be brutal.

 

We can argue all day about whether the health benefits of a 2nd lockdown exceed the health costs or not, and frankly, we don’t know. There is definitely a health cost in cancer patients missing appointments, unemployment causing families to choose between heat and food, depression and so on.

 

What we can be certain about is the devastating impact a lockdown has on the economy. Last time, 33% was wiped off the UK stock market. It has since recovered around 15%, but are we about to see those gains wiped out again?

 

It seems the government is so scared of being accused of not taking enough action to avoid a second peak that they are willing to gradually shut down the country again.

 

Winter is not even here yet, but 1/5th of the country have been living under full local lockdowns, and now the first of many expected new national measures have been announced – including curfews certain to kill off parts of the economy, ending jobs, reducing national spending power, and ultimately impacting all businesses.

 

So what does all this mean for investors? Do we just accept that our portfolios are likely to take a beating? Or can we act now to limit the damage? Or even to invest in some lockdown winners?

 

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Shuffling Into Another Lockdown

Up until now we’ve been very bullish about the economic recovery, choosing to see the daily panic in the media as the usual hyped-up doom and gloom.

 

We saw policies like Eat-Out-To-Help-Out and the furlough scheme as expensive and untargeted, but also as a positive signal from the government that they wanted life to return to normal as soon as possible after the first lockdown – so we took some cheer from that.

 

These economic initiatives from chancellor Rishi Sunak have always been in contradiction with other government policies.

 

Rishi tells us all to go to the pub, socialise and buy a meal; now Boris tells us we are going to the pub too much and should stop socialising after 10pm.

 

With 1 in 5 people in local lockdowns, and these new draconian curfews, we see the UK heading day by day in the direction of another full-on lockdown, with all the economic impacts that brings.

 

Will There Really Be A Second Peak?

For months the media has been doing its thing of screaming in hysterics about cases rising.

 

However, normal people were left looking at the charts and not seeing what the big deal was. Cases were rising, but not deaths. Deaths were falling.

 

But if we look at deaths in September, the charts are now showing a real cause for concern – deaths are sadly creeping up for the first time since April, which means that a second peak of tragedy might be around the corner.

 

Alternatives To Lockdowns

The Swedish model of not locking down was widely mocked at the start of the pandemic, but as of September 2020 their approach seems to have worked remarkably well.

 

They didn’t lock down and coronavirus has been no worse there than in the UK, with deaths in both countries at 6 for every 10,000 people, or 0.06% of the population.

 

Could the same work in the UK? Sweden still has a strong economy, people still have their freedom, and lives are being protected through voluntary social distancing.

 

Forget The What-Ifs

Regardless of the alternatives, and what-if scenarios, the reality is that we are stuck with our government’s approach, and therefore probably stuck with lockdowns for the foreseeable future.

 

So – with that in mind, what do we do about that as investors?

 

What We As Investors Do Now

Scenario #1 – If Life Returns To Normal In 2021

While we had this scenario as the most likely outcome just days ago, with Lockdown 2 measures already being implemented before Winter has started, we now see this as unlikely – though still possible.

 

If you think life will return to normal in 2021, then now is the time to buy stocks which are plays on economic recovery.

 

These include amongst others the airlines and the housebuilders. Jet2 is the best of the UK airlines in our opinion, with incredible business fundamentals and a huge pile of cash to help see it through tough times. Before Covid, they were poised to fill the space left by Thomas Cook’s collapse and massively grow their revenue.

 

Redrow is the equivalent company in the housebuilding sector, with great fundamentals, at a rock bottom share price. This stock though is reliant on the government extending the help-to-buy scheme in 2021 – a scheme which accounts for over half its sales – and on land prices retaining their current high values.

 

We expect help-to-buy will be extended, but nothing is confirmed.

 

Both these stocks are dependent on business-as-usual activity in 2021. Jet2’s share price is very volatile right now, with big swings almost daily, moving on covid news.

 

If you’re are buying, wait until a bad news day to buy Jet2 stock.

 

Both these stocks were priced very temptingly at time of writing, but both depend on a sunny 2021 for near-term success. I personally own shares in both of these stocks.

 

Scenario #2 – If 2021 Sucks Too

Quite a lot changes if 2021 is also a write off. For one, the culture will have changed such that people no longer want to book holidays for fear they’ll be quarantined, or their destinations being placed under lockdown during their visit.

 

People will grow used to not going to the pub, and withdraw into virtual worlds. High street shopping will be an activity done in a past life, no longer needed or wanted.

 

Working from home will become the default position. If government policy on working from home changes with the wind –  “work from home, don’t work from home, work from home” – many companies will invest in making the move permanent, leaving city centre restaurants and other businesses which serve office workers dead in the water.

 

Money will stop flowing around certain parts of the economy, but will not stop entirely. Instead, more transactions will happen online, to the benefit of payment facilitation stocks like Paypal and Visa.

 

The UK stock market will slump, while fundamental rearrangements in the economy take place. High street retail will be killed off even more than it already has, the tourism industry will lag, and the price of oil will remain in the doldrums.

 

Taken together that’s a cocktail for the FTSE 100 to revisit the lows seen in the 1st lockdown.

 

What To Invest In If 2021 Is A Write Off

#1 – Tech Stocks

We touched on one area just now, being technology and fintech stocks. The UK itself has some sweet tech stocks hidden at the small and mid-cap end of the market.

 

But America has all the big tech companies. During the first lockdown, tech stocks boomed with the likes of Amazon, Netflix, Paypal, Visa, Zoom and Microsoft providing services to people and businesses who didn’t necessarily need them before.

 

The argument against relying on Tech to save the day in a second lockdown is that prices have held steady at close to all-time highs all summer, because nothing has fundamentally changed.

 

Many people are still either furloughed or working from home, or are still too scared to change their new online shopping habits back to leaving the house to get supplies.

 

So in the short term we expect a second lockdown would just consolidate and confirm the positions of these giant tech companies as masters of all they touch.

 

But longer term, tech innovations introduced during lockdowns will continue to be popular. People don’t want or need to commute on packed and dirty trains, nor spend their evenings sat in traffic. And companies realise they don’t need to pay for office space.

 

And the future of shopping will be shaped by E-commerce stocks like Amazon and online payment facilitation stocks like Paypal and Visa… coronavirus or not.

 

#2 – Defensive Stocks

Defensive stocks include things like national defence, cigarettes and consumer staples – things that are in demand regardless of whether there is a recession or not.

 

The advantage of defensive stocks is they also tend to be dividend champions, so while we’d hope that their share price would be somewhat protected, they also pay out big chunks of cash consistently to their shareholders.

 

In this way, you stand to at least get a cut of the profits regardless of what happens with the share price.

 

#3 – Global Trackers

These should be the core of your portfolio – globally diversified ETFs which invest in thousands of stocks around the world, for almost non-existent fees.

 

A favourite of ours is VWRL, a Vanguard fund which invests in 3,500 large and mid-cap stocks across 50 countries, weighted towards those with the largest markets like America.

 

If the UK commits financial suicide, it doesn’t mean the rest of the world has to.

 

But in the event of a global crash, it would make global trackers an even more attractive buy, as prices would fall across the board.

 

With ETFs, one of the best times to buy is during a crash because you can buy low, safe in the knowledge that the diversification they provide protects you from the risk of individual companies going bust.

 

Especially during uncertain times, it is wise to focus more on ETFs and less on individual stocks. We are still buying well researched individual stocks during this time, but the easy money during a crash is in ETFs.

 

#4 – Gold and Bonds?

Traditionally, the answer to a plummeting stock market is to have held a position in bonds. Bonds certainly saved a lot of portfolios back in March 2020 when stocks were crashing hard.

 

But bonds will not come to the rescue this time because bond prices are already at record highs and yields at record lows.

 

QE, or money printing by central banks, helped push up bond prices the first time around, but little has changed since then – banks are still printing, and bonds are still very expensive.

 

Gold is another recession hedge, which traditionally is good to hold before a crash. But gold too is already at record highs.

 

Could gold rise further during a winter of discontent? It probably could. But we are wary about placing too much of a reliance on an unproductive asset to save us.

 

We think it’s better to weather a storm with defensive stocks which at least pump out dividends.

 

What To Invest In If You’re Unsure?

None of us can predict the future accurately, and our best guesses can be upended by a meddling government or by an unpredictable pandemic.

 

There may even be many more lockdowns over the years ahead – as Julius Casear lamented, “All bad precedents begin as justifiable measures”.

 

Just stick to your target portfolio ETF allocations of Shares, commodities like Gold, Bonds, Property and so on, and stop trying to beat the market!

 

In 30 years time, the world as a whole will move forward – whether the early 2020s were a write-off or not!

 

How are you adapting your strategy to the increased likelihood of a second full lockdown? Let us know in the comments below.