Questor: shares have recovered 60pc of their losses. Will they eliminate them all?

Questor share tips: the market has bounced back impressively despite the earthquake that Covid-19 represents. Has it got ahead of itself?

Richard Evans 10 June 2020 • 6:00am

A pedestrian wears a protective face mask as she walks past the London Stock Exchange — London stocks are on an upwards trajectory after their Covid-induced plunge Credit: Simon Dawson/Bloomberg

Without fanfare, London’s stocks have recovered three fifths of the value they lost in the coronavirus panic of February and March.

The index has been co-operative enough to deal in round figures so the picture is easy to see: before the crisis it hovered around 7,500, then crashed to 5,000; in recent days it has been back at around 6,500. Three 500-point chunks have been recovered, two remain.

Will it get back to its former level? In this column’s view there are at least four things to bear in mind.

First, we saw the index as undervalued before the crash. Admittedly much of the basis for that belief was the yield, which was many times the interest rates available on cash. Of course dividends have now collapsed but if we hazard a guess that 75pc of previous divis will return within a year or two the index will still offer a good income if you buy at current levels.

But the second point – one we have made in the past – is that the yield should not be seen in isolation. The determination on the part of central banks to make cash and bonds yield nothing has an effect on all assets. Income-producing shares, all else being equal, become more valuable.

In other words, investors should value any post-pandemic dividends more highly than they would have valued the same amounts beforehand and the index should reflect this by trading at a higher level.

The next point – again, hardly an original one but worth reiterating – is that share prices look at the future, not the past or the present. They attempt, in other words, to gauge what business will be like after the lockdown, after things have begun to return to normal, and not during the current stasis.

We need to remember this when we hear fears expressed of double-digit economic contraction. GDP numbers are like yesterday’s weather report; share prices are like the long-range weather forecast.

Finally, the epidemic has served as a reminder, if any were needed, that the index is full of rather old-fashioned businesses such as banks, miners, oil companies and tobacco firms.

America’s indices, dominated by technology stocks, have done much better. We probably can’t expect the FTSE 100 to roar back to life unless the economy recovers to the extent that banks and resources companies boom again. That may be some way off.

How does this impinge on the most important question of all: what should investors do?

Questor’s view at the beginning of the epidemic was that mass sales of shares should be avoided and we will stick to it. There will be individual instances where the balance of risk and reward suggests that a sale is now the best course of action and we will be on the lookout for any such cases.

We are glad that we avoided selling any stocks at the very bottom. We were prepared to advise readers to ditch any that seemed at risk of failure but in the end we found no such extreme cases among our recommendations.

If anything the market is now in the opposite mood – improving sentiment has lifted many boats – which is why it might be a good time to offload any stocks whose long-term prospects appear more compromised than the current share price implies.

But in a world where holding cash or buying bonds has been made as unproductive as possible, stocks offer the best investment option.

Update: RWS

London does have some promising “knowledge economy” stocks and one of Questor’s favourites is RWS, which translates patents and “localises” various forms of corporate communication for different markets around the world.

Interim results announced yesterday at first sight seemed less impressive than we have become used to: sales fell by 1.6pc and profits by 6.3pc. More promisingly, net debt fell by 46pc and the dividend was maintained. And some of the anaemic performance by comparison with last year can be attributed to a one-off change in patent processing that boosted business earlier.

The firm said it was seeing “limited impact on customer demand” from Covid-19 and there was “increased activity” from clients working on vaccines and antibody testing.

Questor says: hold

Ticker: RWS

Share price at close: 597p

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