Have Stock Markets Overreacted to Coronavirus?

The Week: Morningstar columnist Rodney Hobson says shares in luxury goods and mining firms have fallen too far in response to the epidemic

Rodney Hobson 31 January, 2020 | 9:46AM
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Investors who suffer a sharp fall in the value of one of more of their shareholdings sometimes try to avoid facing reality by using phrases such as “I caught a cold”. It’s always best to face up to what has happened, however unpleasant it may be. That way you take responsibility for your mistakes and learn valuable lessons.

This week, however, stock markets around the globe really did catch a virus – the coronavirus to be precise. Fears that the epidemic in several Chinese cities would spread across the world’s second largest economy and subsequently into other countries. The two main indices in the US fell 1.6% in one day; the FTSE 100 lost 2.3%; Germany’s Dax and France’s CAC 40 slumped 2.7%.

I accept that a worldwide epidemic would cause disruption and I don’t wish to sound unsympathetic to those who have already died or lost loved ones. But the SARS epidemic was a worse threat: at least this time the Chinese authorities are more alert to minimising the spread.

In cases like this where a reaction is overdone, it is obviously worth looking at the sectors where shares have plunged most. In this case luxury goods companies, airlines and hotel chains naturally suffered. Miners were also set back, in my view excessively, so I topped up my holding in Rio Tinto (RIO) early on the day after the slump. This is a solid company making profits and paying a dividend.

My initial investment has shown a substantial capital gain – and by the end of the day my new investment was already ahead, although the shares admittedly fell back the following day to just below my purchase price. With a yield of about 6%, I look forward to receiving a great return for the foreseeable future.

Long Journey for Car Dealers

The demise of the UK car industry drags on, and with it the impact on car salesrooms. Pendragon (PDG), which runs the Evans Halshaw outlets, produced another disappointing update with a warning that underlying profit for 2019 will be around the bottom end of expectations.

There was, for once, a glimmer of light. The group's performance “improved significantly during the second half of the year despite challenging market conditions and weakened consumer demand in the run up to the General Election”.

Pendragon shares have actually risen by a third since the beginning of October but don’t get too excited: that amounts to a gain of just 3p. However, with the worst performing showrooms being closed and an ageing UK car fleet waiting to be replaced some day, perhaps fortunes really are changing. It’s a long road that has no turning.

It takes a much braver investor than I am to take a punt, especially as the following day it was reported that car production in the UK had fallen 14% year on year to its lowest level since 2010. Don’t even think about it unless you are prepared to risk your stake being wiped out. I shall, however, be interested to see what Pendragon has to say when it presents its annual results on 18 March.

The Saga Continues

Shares in Saga (SAGA), the provider of services for the over-50s, shot up on the latest trading update. I’m all for optimism but this company has been a poor performer for too long, so don’t get overexcited. There was nothing in the update to suggest that the promised turnaround is here at last.

Underlying profits are still merely in line with previous guidance and Saga “continues to face challenging markets in insurance and travel”.

The shares have lost two-thirds of their value in less than 10 months and have been on the slide for nearly three years. Give this one a miss until there are clear and tangible signs that the new leadership is achieving more than the old.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Pendragon PLC23.51 GBX1.75
Saga PLC301.80 GBX-1.69

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.