With a second wave of Covid infections threatening to derail what has been an encouraging economic recovery out of the lockdowns, yet markets rallying strongly, it is natural for investors to consider taking risk off the table and sell out of equities. Simon Edlesten, co-manager of the Mid Wynd International Investment Trust and Artemis Global Select Fund, articulates why the response should be more nuanced than a blanket sellout of an asset class like equities.
“As a global equity manager, I am inevitably going to be accused of selling my industry’s wares. But I do believe equities still represent the best home for many savings.
Loss aversion means many investors are wary — it is human instinct to be edgy about investing in an asset class that saw a 34 per cent peak-to-trough crash only a few months ago. And, in the absence of a vaccine, the pandemic still poses a threat to the global economy.
We have seen extraordinary bifurcation within markets this year — Covid winners driving recovery and serious losers acting as a drag. That is not an argument for avoiding equities — it is an argument for being selective.
Good-quality companies have survived wars, not just pandemics. They share some
key characteristics:
  • They make a product or service with steady-to-growing future demand
  • They make good cash profits — more than covering rent, wages, tax and other costs
  • Their historic dividend paying has not left them too short of cash to invest for the future
Many companies meet these criteria, but whole sectors fall down on parts. For instance, oil and tobacco fail on the future demand point.
Accept that you will not get all your calls right, so diversify between sectors — and geographically, too. The impact of the virus will be different from country to country, as will the responses of governments and the stimulus effects of growth versus inflation….
…Some will question timing. They will say that, because the market globally is close to an all-time high, it is better to wait for a correction. They may have a point. But the problem is that while you are sitting in cash, earning close to nothing, your money is being eroded by inflation. And when is the right time to invest? Few of us get the call right — which is why we say equity investing is for pots of money you do not need for seven to 10 years.
You can drip-feed your money in, though this approach is not without flaws. In the past 30 years the UK stock market has had nearly twice as many up months as down months, so you risk paying more than needed, but this is the price of insuring against the regret of diving in with all your money at the top of a market.”
Some will point to Prof Napier’s bezzle risk. The recent Wirecard debacle, as revealed in the Financial Times, shows that the bezzle is indeed large and can strike equity markets, too. Companies that seem very profitable will always interest stockpickers like us, so I am indebted to my colleague, Rosanna Burcheri, who identified through dogged analysis that Wirecard produced little cash profit, despite declaring large amounts of earnings. Similar analysis saved diligent managers from investing in Enron 20 years ago — it had accounting earnings but no cash earnings. Fundamental analysis is the only way to spot the bezzle.”

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