Stock market volatility has returned with a vengeance since the appearance of the Omicron virus variant.
Markets around the world slumped a week on 26th November. The UK’s FTSE 100, for example, dropped 3.6% on the day. And trading continued to be volatile in the following weeks, as investors wrestled with the latest turn in the coronavirus saga.
Still, the Footsie remains well above ‘correction’ territory (a fall of 10% to 20% from a recent high). But there’s clearly a good deal of nervousness among investors and some fear of a full-on crash.
Indeed, there are individual stocks that have fallen far further than the overall market since Omicron arrived on the scene. Although also some that have made gains.
Winners
BT‘s share price ended last week 4.8% higher than its level before ‘Omicron Friday’ — making it the FTSE 100’s standout performer over the period.
The price was buoyed by a report in the Economic Times that Indian conglomerate Reliance Industries, which failed to get its hands on T-Mobile’s Dutch unit earlier this year, was now weighing a bid for the UK telecoms group. Although Reliance subsequently denied any intent to do so, it did little to dampen investors’ enthusiasm for BT’s shares.
Looking at BT and the Footsie’s more modest ‘winners’, I don’t see too much going on sector-theme-wise. But it’s a different story at the other end of the risers-fallers table.
Losers
British Airways owner International Consolidated Airlines was the FTSE 100’s biggest sufferer. Its shares slumped 14.7% over the period BT gained 4.8%. Jet engine maker Rolls-Royce (-9.2%) and GKN Aerospace owner Melrose (-10.3%) were also heavy fallers.
Hotel stocks were sold off too, with Premier Inn owner Whitbread down 7.2% and international multibrand owner InterContinental dropping 9.9%. Cruise ships operator and former blue-chip stock Carnival fell 14.3%.
In other travel and leisure sub-sectors not represented in the FTSE 100, mid-cap pub groups — Mitchells & Butlers (-8.5%) and J D Wetherspoon (-8.6%) — were hit. Cinema chains Everyman (-6.9%) and Cineworld (-8.5%) were also unloved. As were stocks in other leisure niches, such as Gym Group (-12%).
Market crash ahoy?
Unsurprisingly, the sectors and stocks that have come under the cosh since the Omicron variant appeared are the same as those that spearheaded last year’s market crash on the emergence of the original virus.
Uncertainty and fear in the markets (and in the wider world) have returned, but nowhere near at the levels in the early months of 2020. Still, that doesn’t mean we won’t see another crash.
A current trend of tightening restrictions on international travel — as well as in leisure and hospitality settings in a growing number of countries — could be highly damaging for businesses in those sectors. And the contagion could spread to other parts of the economy.
Somewhere along the line, stock markets could crash again.
Strategies
Here at The Motley Fool, our core investment philosophy is to seek long-term ownership stakes in businesses with durable competitive advantages that are capable of producing high returns on shareholders’ equity without employing excessive levels of debt.
However, I know many Fools run other strategies alongside the core long-term-buy-and-hold philosophy. One I’ve used myself at times is to look for value among the most beaten-down stocks in a market crash.
These businesses may not have the best margins in the world or the most conservative levels of debt. Indeed, vulnerabilities in these areas are likely to be part of the reason they were so beaten-down in the first place.
However, on an improving economic outlook and positive shift in market sentiment, they can deliver some of the strongest returns for investors. And once the value they had has been ‘outed’, they can be sold.
Taking stock
I didn’t buy any such stocks during last year’s market crash. But if I had and was still holding them, I’d be asking myself a number of questions today. After many have made big gains, am I comfortable with the level of exposure I now have to this species of stock?
Could the company afford the interest on its debt in the event of another economic downturn? Does it have any borrowings that are due for repayment in the next 12 months? And how much upside potential do I see today, weighed against downside risk?
With the Omicron virus variant spreading, rising inflation rampant, and higher taxes coming over the horizon, I wouldn’t want to be exposed to too many lower-quality businesses in vulnerable sectors at this stage.
