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Home As Featured on BT Is Your Portfolio Pandemic-Proof? It Depends on Your Time Horizon.

Is Your Portfolio Pandemic-Proof? It Depends on Your Time Horizon.

The COVID-19 virus may be microscopic in size but it is causing some of the biggest problems the global economy has ever seen.

As it stands, the economy is going through what I call a “slow-motion train wreck”.

With businesses being forced to shut down, companies are being choked off from their much-needed revenue.

The response from the Singapore government has been telling.

No fewer than four rounds of budget support measures have been doled out, including the all-important Job Support Scheme that is aimed at providing wage support so that businesses can conserve cash.

But the government can only do so much.

As the scheme starts to taper off, many businesses will have to fend for themselves again.

Demand and spending on goods and services remain far below pre-pandemic levels. As such, some businesses may not survive the fallout.

The damage could be widespread, affecting industries from aviation and tourism to food & beverage and retail.

There are only a few sectors such as healthcare gloves and online service offerings that have been spared the carnage.

A dividend “apocalypse”

As profits tumble and cash flow becomes tighter, numerous companies have slashed their dividends.

My colleague likens this crisis to a dividend “apocalypse” as income-seeking investors reel from the shock of seeing their stream of passive income decline sharply.

If we take the 30 components of the Straits Times Index (SGX: ^STI), only four have reported year on year increases in dividends for the first half of 2020.

The four companies are Jardine Strategic Holdings Limited (SGX: J37) (+5%), Mapletree Logistics Trust (SGX: M44U) (+1%), Singapore Exchange Limited (SGX: S68) (+3%) and Venture Corporation Limited (SGX: V03) (+25%).

Two have maintained their dividends from last year, while seven have yet to report or only pay out an annual dividend.

If you do the math, you will realise that the carnage is staggering.

A total of 17 companies, or around 57% of the index, had reported a year on year decline in dividends.

Even the three big local banks have not been spared, as the Monetary Authority of Singapore had recently called on them to cap the amount of dividends paid out to 60% of last year’s annual dividends.

As dividends are cut, the share prices of these companies have tumbled in response.

As an investor, you could well be facing the double whammy of capital losses and a leaner dividend flow.

How safe is your portfolio?

The reality is that share prices reflect a mix of current sentiment and bleak prospects, which explains why they have remained depressed for the last few months.

The silver lining here is that these losses are merely “unrealised” figures, and will remain so as long as you do not sell your shares and lock them in.

There has been tremendous progress made within the last few months in understanding the disease.

This information allows the human race to equip itself better to fight against the virus, whether it is through the development of a potential vaccine or adopting practices that minimize its continued spread.

Companies around the world have been working feverishly to be the first to develop an effective vaccine that can trigger the body to produce antibodies to fend off the effects of the coronavirus.

Already, early-stage vaccine trials have begun in Singapore this week, while Indonesia is set to start Phase III clinical trials of a potential vaccine developed by China-based biopharmaceutical company Sinovac Biotech.

A Brazilian billionaire, Jorge Lemann, is helping to fund the building of a factory to produce the COVID-19 vaccine with assistance from both Oxford University and pharmaceutical company AstraZeneca PLC.

In short, significant effort is being made on many fronts to control and contain the virus.

With any luck, my hope is that the worst has passed and that strict lockdowns and border closures would eventually be a thing of the past.

Although the number of infections and deaths are still rising, as nations around the world gain a better understanding of the virus, we can begin to cope with less draconian measures such as lockdowns.

The post-pandemic landscape will alter, though.

As we change the way we live, work and go about our lives, many industries may be irreversibly altered.

For example, the aviation sector may never be the same again as airlines work to implement new processes to screen passengers for infection. Planes may also need regular deep cleaning and disinfection to restore confidence in flying again.

In the same spirit, investors need to critically examine their portfolio to assess which companies may not survive and to possibly re-allocate their funds into those that will.

It is undoubtedly a painful process as it could mean taking some losses that are unavoidable.

But rather than holding on to companies that may never return to their pre-pandemic highs, it is better to bite the bullet and channel the money to more promising businesses.

Time heals all wounds

If you are holding on to great businesses, then time is all you need to heal your portfolio.

Tough operating conditions may temporarily depress the share prices of all companies, regardless of their quality.

In the short term, that is.

Investors tend to throw the baby out with the bathwater when faced with stress, as emotions overwhelm logic.

But if the business you own carries a strong franchise and sells products or services that are still relevant post-pandemic, then it may be wise to simply hold on to it.

In fact, lower valuations may even open up opportunities to grab additional shares on the cheap.

Therefore, the essence of doing well in the market involves both an understanding of how businesses work, and being able to control your emotions and not panic when the chips are down.

Get Smart: Great businesses can recover and grow stronger

The answer is thus clear – your portfolio should be safe from this pandemic if you own a mix of strong companies with robust business models and prudent balance sheets.

In the short-term, share prices may display tremendous volatility.

Sharp plunges are not uncommon as fearful investors bail out, while those investing on borrowed money may also have their shares force-sold if they cannot cough up money to top up their margin account.

Share price movements may also be exacerbated by transient events.

But as Smart Investors, we know that all these will eventually pass.

Our time horizon is always measured in years, rather than weeks or months.

Great businesses always do recover when crises have passed.

Not only that, but they also grow stronger as their dominance enables them to grab more market share when their competitors are floundering.

These are timeless principles that can keep you safe from the pandemic, and help you to steer your way to financial freedom.

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Note: An earlier version of this article appeared in The Business Times.

Disclaimer: Royston Yang owns shares of Singapore Exchange Limited.

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