Hidden investment opportunities in the crisis. Bold investors will be rewarded.
The coronavirus has triggered a decline in global stock markets. However, even a crisis offers worthwhile investment opportunities. Every stock market crash is followed by a recovery that resourceful investors can benefit from.
Market overreactions are creating investment opportunities
The markets and the media seem to have only one thing in mind right now: COVID-19. The virus has spread across the world in just 80 days – the associated financial market panic circled the globe even faster. Many aspects of life have been turned upside down. But stock market crashes, like epidemic hysteria, are nothing new. This is illustrated by examples from the tulip crisis to the banking crisis, as well as panicked reactions to epidemics that seem excessive in retrospect, such as the reactions to SARS, avian influenza, and Ebola.
They all have one thing in common: When people interact, their hopes and fears come into play. Instinctive behaviors cause people to overreact and can trigger euphoria or panic. When this happens, the only thing that matters is: overreactions create opportunities. And clever investors can benefit.
Stock market crashes reward bold investors
Crashes and recoveries are two sides of the same coin. If you look closely, you will discover many similarities. Three thoughts:
First, both are driven by crowd psychology, not fundamentals. If you look only at media reports or fundamentals, you will misinterpret the panic and miss out on the investment opportunities that every crisis creates. That is true today as well.
Second, no crisis lasts forever. Experienced investors know crises offer the best investment window. The night is darkest just before the dawn. This is as true in nature as it is on the stock exchange. The beginning of the recovery often creates the best daily profits. Such moments reward the bold, i.e. those who invest before reports of a recovery come in.
And third: When stock exchanges seem to capitulate and the economy stutters, stimulation, first from monetary policy and somewhat later from fiscal policy, usually follows. Successful investors recognize this valuable signal: Now is the time to be invested.
Even the coronavirus crash will be followed by a recovery
Of course, you may believe that the current investor panic is different than all previous occasions. However, the whole weight of history speaks against this opinion. People, companies, and societies have always been extremely adaptable. They develop strategies to avoid and manage risk, or simply to live with it. For this reason alone, it is wrong to extrapolate the economic standstill of the past few weeks into the future.
What investors can take from the current situation
- Crises show the value of diversification. Those who invest with a discretionary mandate benefit from its resilience on bad days and its opportunities on good days. Over the long term, it is the best investment solution.
- "Core-satellite" strategies enable you to benefit from new winners after a crash. It was once again the case that companies that outperformed in recent years fell the most. IT equities alone lost USD 700 billion in total market value last week.
- The digital economy is the biggest winner of the crisis. Whether in the healthcare sector or in the automation of production processes – digitalization always helps companies and employees better protect themselves against epidemics and strengthen business processes. The rise of the digital economy will be significantly strengthened by this crisis. Investors should benefit.