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Market Outlook

Trading tactically in the coronavirus economy

Last week the S&P 500 experienced its worst week since the 2008 financial crash as the coronavirus continued to play havoc on the economy. Not helping things were Washington lawmakers deadlocked over a stimulus package to deal with the economic fallout of the virus. An ability to tactically reallocate your investments or trading positions has never been more crucial then?

On Wednesday, the strain was felt in the $233 billion SPDR S&P 500 ETF Trust as investors pulled their money out in the biggest outflow since 2018. The exchange traded fund, which tracks the S&P 500, had previously seen six days of huge inflows that totalled $16.8 billion. A win for tactical traders that would have avoided a passive index tracker such as this, in the search for alpha.

Considering what’s happening in equity markets, sitting things out in cash could be the best move. But for tactical traders, it allows them some breathing space to pinpoint the next opportunity in fast-changing markets.

“Cash is an attractive asset right now; as it gives you options; once we get a better view on how individuals and businesses will be supported it will be easier to analyse the outlook and valuations,” said Emma Wall, head of investment analysis at Hargreaves Lansdown, writing in Investment Weekly.

“Cash is an attractive asset right now; as it gives you options; once we get a better view on how individuals and businesses will be supported it will be easier to analyse the outlook and valuations” - head of investment analysis at Hargreaves Lansdown, Emma Wall

It’s true that with so much uncertainty in the economy and central banks responding to the crisis with huge fiscal programs, markets are incredibly volatile. So is there value out there for tactical traders?

Some think so. Mohamed El-Erian, Allianz chief economic advisor, told CNBC there “[are] areas of long-term value, even now, before we turn around. But you have to have a tremendous ability to withstand volatility.”

El-Erian cautions investors to back companies with strong balance sheets. These companies should “come back really strong,” post-coronavirus.

 

Opportunity in Asia-Pacific markets

Given current market volatility, pulling money from underperforming passive vehicles and returning it to the stock market via more tactical positions is a reasonable strategy.

Livemint’s Sunita Abraham suggests that with equity markets in meltdown, now could be the time to allocate assets, citing Indian stock markets as an example where last Thursday the Sensex lost 2,919 points and the Nifty 868 points.

Abraham argues that this is a much-needed correction in a market where equity valuations have been stretched for some time. For investors pulling out of US stocks, now could be time to buy into India.

China is another market that could interest equity investors pulling out of US stocks. Zacks analyst Sanghamitra Saha highlights that last week several Chinese ETFs beat the S&P 500.  Reflecting on Asian markets in the wake of the coronavirus Joanna Kwok, JPM Asia Growth Fund portfolio manager said:

“The vibrancy of its equity markets, the “Made in China 2025” plan and the MSCI Index inclusion have made a compelling case for Chinese equities to be considered as a separate asset class in portfolios,”

“The vibrancy of its equity markets, the “Made in China 2025” plan and the MSCI Index inclusion have made a compelling case for Chinese equities to be considered as a separate asset class in portfolios” - Zacks analyst Sanghamitra Saha

Kwok highlighted 5G investment opportunities, gaming and cloud computing as opportunities in Asia. Yet investors need to be wary. Asia-Pacific markets are still vulnerable, especially as more countries close their borders.

 

Industries bucking the trend

Without doubt the coronavirus has changed how we invest and how we live. Robinhood points out that in a society where social-distancing is the new norm, investors should keep tabs on the growing trend of things like online grocery delivery and take-out only restaurants.

For example, in the UK, online grocer Ocado has seen its share price go up over 10% in the past month. In the US, Domino’s is hiring an extra 10,000 members of staff to handle delivery. Tech firms like Slack and Zoom have seen their share prices gain as office workers are told to work from home.

10,000

Number of extra workers being hired by Domino's to cope with delivery demand

 

Increased demand in these companies could, of course, be short-term. Over time, things might return to normal. But for the tactical trader, being able to move assets quickly into these stocks could see some gains, providing they properly weigh up short to long-term risk.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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