The FTSE 100 market crash has been dramatic. But the index is recovering fast right now. So, I’ve been asking myself some questions such as are these gains sustainable? Where should I invest right now? And should I buy anything at all or should I wait? Here are my answers.
What’s happening right now?
First of all, I totally agree with my colleague Manika Premsingh that the FTSE 100 might not have found its bottom just yet. Market crashes do not normally end in less than two months. Even though the current situation is temporary and good companies will survive, we do not know how long ‘temporary’ will be and all the news flow looks rather scary. That is especially so as there are risks that there could be several Covid-19 infection waves.Â
Charlie Munger, Berkshire Hathaway‘s vice-president, is currently not making any purchases, holding large piles of cash instead. Yet it does not mean that he will not buy very soon. He is waiting for the right opportunity. I would suggest smaller investors should also have some spare liquidity and not dive in just because a share is cheap. Â
Yet buying good companies now could yield rich rewards. Before we buy anything, we should calm down and think where the company would be in five or 10 years, of course. The fittest businesses will survive and prosper and if you can identify these companies at this stage, you could end up retiring rich.Â
FTSE 100 opportunities
So, which companies would I invest in now? Defensive shares specialising in food, drinks, pharmaceuticals and other essentials would be appropriate for risk-averse investors. I would also go for companies with a sound dividend history like pharmaceuticals giant Glaxosmithkline (LSE:GSK). You can still buy the company at a discount compared to where the shares were in January and February. The dividend yield of about 5% is lower than some. But it seems to be more sustainable than that of, say, many oil companies and financials, although GSK’s dividend cover ratio of just 1.16 is less desirable.
The price-to-earnings (PE) ratio of less than 18 may not seem to be a bargain compared to that of riskier sectors. However, the company has been increasing its sales revenue and profits for several years, which is a very good sign.
And there is a strong topical edge too. Glaxosmithkline and French giant Sanofi have started working to develop a coronavirus vaccine. It is not alone in this as many other large pharmaceutical companies are currently working to develop one. But GSK also produces other coronavirus-relevant products, including pain killers, vitamins, dietary supplements, and test kits.
Where else to invest?
Apart from specific companies, I would also suggest investing in the FTSE 100 index itself. That provides diversification, thus reducing the risks. It is highly unlikely that all of the companies of the index would go bankrupt and you would get a chunky dividend yield of more than 4%.
And what about looking outside of the stock market? It is often said that a classical investor portfolio should consist of 50% shares and 50% bonds. Yet after the Bank of England’s rate cut, some companies’ real bond yields are negative. And some more generous ones from less ‘sound’ companies are speculative and do not quite compensate the risk the investor is taking. I think I will stick with the FTSE 100!