Current correction may provide attractive long-term entry point

The UK is two or three weeks behind other European countries in terms of the spread and containment of the coronavirus. Therefore, the bad news is likely to keep getting worse for some time. This is why, despite the already severe market correction, investors have to remain careful.

Taking a longer-term view, this can be an opportunity to reshape portfolios, and rotate money out of companies that have held up well – such as home entertainment, gaming, and IT professional services– and into more beaten up stocks. However, we are not yet tempted to dive back into markets. Similar to the financial crisis, we are seeing constant brutal repricing of risk, as market participants try to determine what the value of companies are in such an unprecedented environment – with large falls, sharp rallies and then new lows, all within a few days.

Events and consumer sectors badly affected by sell-off

By selling down some holdings a few weeks ago and raising cash, we have increased our allocation to cash to over 7%. We have removed stocks from the portfolio in areas where there are specific risks. The events and exhibition space, for example, was one of the first sectors badly affected and we reduced our holdings. We are also largely avoiding the consumer space, which is the next sector dramatically impacted.

In these times, the key is to remain flexible and reactive, with cash ready to be deployed when appropriate. Rather than the absolute level of the market, we are paying attention to the quantity and momentum of bad news. The market will only bounce back when the bad news stops getting worse.

Quality under-leveraged businesses best positioned to rebound

Eventually, there will be fantastic opportunities to buy high-quality businesses across the market. However, it will be necessary to remain selective and look for low-leveraged, high-quality businesses with good margins. Leverage is particularly important to watch, as companies currently near the top of their facilities could suddenly require refinancing or an equity issue in this volatile environment. Seemingly cheap stocks are likely to get cheaper.