Why Should UK Investors Be Selective This Time?

While the coronavirus pandemic may be an international health crisis at its core, there’s no doubt that governments across the globe are now focusing on the socio-economic impact of this catastrophe.

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The world’s stock markets have certainly felt the full force of this outbreak, falling by a staggering 37.1% between a high in February to almost record lows less than four weeks later. While the S&P 500 may now be an estimated 20% higher than its own mid-March low, it remains at the mercy of Covid-19, sustained economic stimulus packages and mass global unemployment.

This should put the recovery of stocks of indices into sharp perspective, but precisely how selective should investors be when appraising their equity options in the current climate?

The ‘Recovery’ of U.S. Stocks – What do You Need to Know?

As we’ve already touched on, the major indices in the U.S. have already begun to rebound from their Q1 lows, despite the fact that North America is now reporting its highest rate of unemployment since World War II.

While job losses have soared and quantitative easing has taken hold stateside, however, these index gains have continued for more than a month low, with the Nasdaq having fully recovered all of its 2020 losses incurred to date.

While this has inspired optimism amongst traders and encouraged many to return to the market, however, this ‘recovery’ may actually be misleading and based on a fundamentally false perception.

More specifically, it can be argued that the stock market performance is actually a couple of months ahead in terms of its timing, while also being predicated on the assumption of a quick and full recovery.

Make no mistake; the socio-economic impact of Covid-19 may ultimately be as far-reaching as it is significant, with even developed nations such as the UK expected to shelve up to 35% of their GDP over the course of 2020.

This means that any short or near-term stock recoveries should be approached with caution, particularly as we have yet to see how successful individual nations are at implementing their lockdown strategies and minimising the economic impact of coronavirus during the remaining financial quarters of 2020.

Do Micro-Cap Investments Offer a Viable Option in the Current Climate?

It’s estimated that 66% of all actively-traded funds fail to beat the market over any period of five years or more, which is why relatively low-risk vehicles such as dividend investment tend to be favoured during times of economic tumult.

However, the associated returns here can be negligible, and wholly unsuitable for investors in the market for significant market importance. In this respect, small and micro-cap stocks may offer a fascinating alternative, and one that offers access to assets with small market capitalisations and the potential for inflated growth in the future.

Of course, such unlimited growth potential should be offset by the volatile nature of micro-cap investments and their susceptibility to market price movements, particularly in a climate where company shares are likely to fluctuate wildly on the near and medium-term.

However, there’s also the potential for such assets to be undervalued at the best of times, but especially during times of economic decline and tumult. This arguably provides greater margin for error, which is why so many modern investment trusts have a clear focus on micro-cap stocks and similar asset classes.

Ultimately, any investment portfolio needs to be diverse and well-balanced, particularly during periods of economic decline and crisis. However, there’s no doubt that micro-cap stocks can offer particular value for investors with a long-term outlook, so long as they have a viable risk appetite and a core understanding of the markets.

Interesting related article: “What is an Investment?