Our Coronavirus Journey – Part 4

The Coronavirus outbreak will doubtless have a devastating impact on many companies and individuals. But I’m remaining positive on the longer term outlook!  

There are many reasons to be positive amongst the gloom. Hopefully this post can instil a bit of hope that things will be OK! 

Stock Market 

Most companies will be valued based on their expected future earnings. After all, those company profits are what shareholders will be entitled to. Future earnings for shareholders come in the form of direct cash returns (dividends), or through increased company value if those profits are reinvested into further growth.  

Exploring this principle for pricing can show why I am confident in the stock market bouncing back in the near future.  

The P/E ratio can be used to measure this valuation. Very simply, this is the current price divided by the company earnings. 

P/E ratio = Market value / Earnings

There are many variations of the P/E ratio but for the sake of this article, it isn’t worth getting into that level of detail. 

The average P/E ratio in the FTSE All-Share at the end of April was around 13.5. This reached a low point of around 11 at the beginning of March. Before this crisis, and the subsequent stock market dip, the P/E was around 17.5. This means the average company has seen 4 years (17.5 down to 13.5) worth of profits wiped off their ‘value’ at recent price levels.  

Working on the assumption that things can get back to some form of normal within the next few months, this seems a very fair valuation to me.  

While many companies are currently at a standstill, it would seem somewhat conservative to suggest that they will lose out on 4 full years’ worth of profits.  

If you follow this way of thinking, then you will agree that this isn’t the end of the world and current prices could present a good opportunity to continue with your plan! This will mean you’re buying more for your money at the current discounted prices. 

There will be winners and losers of course. Some companies will probably not survive. However, this is simply the natural process of the stock market, and they will be replaced by stronger, more opportunistic competitors.  

Index Investing

This is exactly why we stick to an approach of investing only in index tracker funds. We are never tied to the uncertain futures of single companies because we own a diversified group.  

Many companies with switched on management teams will actually adapt to take advantage of this situation. Remote working can offer significant savings to many, while improved online offerings can only help drive sales going forward. There’s always money to be made in diversity! 

Individuals 

But what about the effect on individuals? 

Of course, the impact of this crisis will be devastating for many individuals. But we do seem on track to minimise this shock. Many have lost their jobs already, but it could be significantly worse right now. 

My confidence in a relatively quick bounce-back is not least due to the fantastic Government furlough scheme. I’m not interested in getting into politics here. It doesn’t really matter what you think of the Conservative party.  

In my opinion this scheme is a fantastic way of keeping the economy on pause, ready to spring back into action as soon as possible. It’s quite amazing that such a scheme has been implemented, and on such a short timetable. Who would have foreseen this just a few weeks ago?! 

Yes, there are holes in the scheme and not every individual will be covered. But I prefer to have a more positive outlook. On the whole, it will have a HUGE impact on the way we can recover.

A huge number of people will hopefully keep their jobs in this way. The current data suggests 7.5 million people are already on the scheme!! They will (on an individual level) be poised to open their wallets as soon as things go back to (somewhat) normal.  

Fingers crossed many of the frugal habits people have picked up in this lockdown will stick. More likely though, most people will make up for lost time asap! This will give many companies an initial boost as they return from their ‘furlough’ hibernation.  

Positivity! 

Do yourself a favour and turn off the news. Stop browsing those social media feeds, full of endless drama. 

The best doctors, scientists and politicians in the world are working to ensure we come through this stronger than ever. Have faith in them! 

Instead, use the new-found time most of us now have to work on your own issues. Those self-development goals you’ve been neglecting are suddenly more achievable! This is especially applicable if you’re on furlough. Use the time to get fit, learn something new and improve yourself for a better future.  

Over all, I’m remaining positive. I’m hopeful that progress will continue and we can all be back to a (more) normal life soon.

Of course, trying to predict the future of the economy and/or stock market is impossible. The very returns we all seek are due to the fact it is unpredictable by nature. But there are many positive signs and I’m pretty sure things will sort themselves out eventually!

Do you share my optimism, or are you predicting doom and gloom scenarios? Let me know in the comments! 

Coronavirus Series  

Part 1 – Our Coronavirus Journey

An early look at what changed in our lives in the immediate aftermath of the pandemic.

Part 2 – Seeing Opportunity in Adversity

An overview of how we have been seeing opportunities in our new circumstances.

Part 3 – Frugal Food – Grow Your Own

Locked down at home? What a great opportunity to grow your own food!!