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Robert Stephens, CFA, discusses why there could be buying opportunities in the FTSE 100 in the wake of the coronavirus outbreak.
The FTSE 100’s recent decline has been faster than any market crash experienced over the past 30+ years. The financial crisis and the tech crash ultimately led to greater percentage falls in the FTSE 100’s price level than has been the case so far in 2020. But the speed with which the stock market has declined since mid-February is only exceeded by the 1987 crash.
Investors in the stock market have, as always, three options available to them. They can buy, sell or hold. On a short-term view, the spread of coronavirus and its impact on a range of industries could lead to further falls in the FTSE 100’s price level. But, on a long-term view, I believe there are buying opportunities aplenty. I, myself, am continuing to invest in the stock market regularly throughout this crisis, and I am anticipating a recovery from my portfolio in the long run.
The housebuilding industry is likely to experience a challenging 2020. Buying a new home may not be a priority for most people at the moment. Lower demand for properties built by companies such as Taylor Wimpey (LON:TW.) may, therefore, lead to a fall in its profitability.
However, the company has a net cash position of £546 million. It also has the capacity to take measures such as reducing its dividend and cutting costs to offset a slower rate of top-line growth.
In addition, the recent 0.5% fall in interest rates may help to support the sector and make housing more affordable for first-time buyers. In the long run, new homes will be required, and I believe that Taylor Wimpey’s price-earnings ratio of 6 takes into account the short-term risks that it faces.
Global consumer goods
Global consumer goods companies such as Diageo (LON:DGE) have already reported that coronavirus has hurt their financial performance. More of the same could be ahead, as the disease spreads into a greater number of countries on a larger scale.
Diageo’s range of alcoholic beverages is highly attractive in my opinion. They enjoy wide economic moats through a high degree of customer loyalty, and the company’s diverse geographic spread means it is not reliant on a specific country for its growth.
The long-term prospects for China and other emerging markets are bright in my view, and Diageo could be one of the businesses to benefit from this.
Healthcare supply chains and sales prospects have been hurt by coronavirus. AstraZeneca (LON:AZN), for instance, has invested heavily in its emerging markets segment in previous years. The impact of coronavirus on China has contributed to a 12% fall in the company’s share price since the start of the year.
Long term, the spread of non-communicable diseases is forecast to rise as factors such as urbanisation lead to issues regarding air pollution and lifestyle change.
AstraZeneca may not be a defensive stock in the short run, but its pipeline and exposure to emerging markets could make it attractive over the long term.
All three companies and sectors discussed in this article may experience further declines in their valuations. It is not possible to accurately forecast the impact of coronavirus on the world economy at this stage.
However, long-term investors could stand to benefit from the low valuations which are on offer across the FTSE 100. I’m not expecting a quick turnaround from the index. But its long-term prospects are still bright in my opinion.