Where to invest when the markets crash?

Thursday, 28 September 2017
Melbourne, Australia
By Bernd Struben

  • A crisis-proof sector
  • A brand new ‘crisis proof’ sector

The S&P 500 is up 11.98% so far in 2017.

The ASX 200, on the other hand, has been almost flat. Year-to-date returns stand at only 0.31%.

Yet that’s hardly a market crash.

So why worry now about where to put your money when markets do crash?

Because, as the old saying goes, markets take the stairs up and the elevator down. Meaning you should prepare your portfolio before the first cracks become obvious to everyone.

This is one of the reasons publisher Kris Sayce — alongside analysts Ryan Dinse and Selva Freigedo — launched Crash Market Investor earlier this year.

Kris is convinced markets are overindebted and overvalued relative to any of the earnings we’re seeing. And though he doesn’t claim to know the precise timing of the coming crash, he’s certain it will be within the next two years. Possibly much sooner.

And he’s not alone.

The Australian Financial Review, in an article earlier this month, reported:

William White, the former chief economist at the Switzerland-based Bank for International Settlements and one of the few mainstream academic economists to have predicted the 2008 financial crisis, warned that the present situation in markets “looks to me to be very similar to the way it looked in 2008, which is that we’re seeing all sorts of odd developments in financial markets.

“The prices of many financial assets are very high — high yield assets in particular — the VIX is very low, house prices in many countries have continued to rise very strongly, equity markets are very high — so all of these things I think are a source of concern.”

And he warned investors not to rely on central banks to ride to the rescue. “The fundamental problem is that we do not have a liquidity problem that central banks can solve,” he told Bloomberg TV.’

Because the Crash Market Investor team isn’t content to sit on the sidelines hoarding cash, they look for opportunities to profit before, during and after the coming meltdown.

And they look for stocks and sectors that are — as much as possible — ‘crisis proof’.

Selva has more for you in today’s special guest essay below. Right after the markets…

(Want to check out all the recommendations at Crash Market Investor? Start here.)

Markets

Overnight, the Dow Jones Industrial Average rose 56.39 points, or 0.25%.

The S&P 500 gained 10.20 points, or 0.41%.

In Europe, the Euro Stoxx 50 index finished up 18.79 points, or 0.53%. Meanwhile, the FTSE 100 climbed 0.38%, and Germany’s DAX index gained 0.41%.

In Asian markets this morning, Japan’s Nikkei 225 index is up 71.51 points, or 0.35%. China’s CSI 300 is up 0.01%.

In Australia, the S&P/ASX 200 is up 17.92 points, or 0.32%.

On the commodities markets, West Texas Intermediate crude oil is US$52.09 per barrel. Brent crude is US$57.70 per barrel.

Gold is trading for US$1,284.21 (AU$1,635.73) per troy ounce. Silver is US$16.79 (AU$21.39) per troy ounce.

One bitcoin is worth US$4,214.72.

The Aussie dollar is worth 78.51 US cents.


A Crisis-Proof Sector
Selva Freigedo

As you may already be aware, Venezuela is going through a major socioeconomic crisis.

There are riots and food shortages. Images of empty supermarket shelves have made news headlines around the world.

There is hyperinflation. Things are so bad that Venezuelans have stopped counting money. Instead, they weigh it. Cashiers don’t have tills…but scales.

The Bolivar — Venezuela’s currency — is not only suffering from hyperinflation, but devaluation as well. In February 2013, one US dollar was worth 4.30 bolivares. By December 2016, one dollar was worth a whopping 673.31 bolivares. That is a 15,658% devaluation in a little over three years!

With such a weak currency, Venezuela has had to reduce imports, as they are way too expensive now. The decrease in imports has meant an increased demand for local products. That is, Venezuelans are going for cheaper items ‘made in Venezuela’.

Surviving as a business through all this economic turmoil can be tough. Yet there are a few sectors that are not only surviving, but in fact thriving with the crisis because of the crisis.

Such as the rum industry.

Venezuelans like their whisky, yet most of it is imported.

According to South American news website Valor, the rum market has grown by 13% in the first semester of the year. Companies like Santa Teresa, which is privately owned, have increased their local market share to 48% and are now even looking to expand abroad.

Another thriving sector is beer or, to be specific, craft beer. Beer is cheaper than spirits and easier to produce.

Yet Venezuela is not the only country undergoing a crisis that has seen craft beer sales thrive. It has become quite popular in the land of wine — Spain.

According to Forbes, as the global financial crisis kicked off, Spain only had 21 microbreweries. By 2015, that number had reached 361. That’s an over 1,700% increase in the seven years following the crisis.

In Argentina, the country that seems to be in permanent crisis, craft beer has become a great anti-crisis business. There, beer represents 50% of the total alcohol market and, in 2015 alone, craft beer sales doubled.

It is true that craft beer has become a growing global trend around the world, even in Australia, fuelled mainly by a change in the way we perceive beer. Consumers are seeking more choice and variety in beer, and they’re looking at craft beer to fulfil that need.

As reported by Beer & Brewer, while traditional consumption of beer per capita is decreasing in Australia, craft beer consumption is growing. According to Euromonitor International, in the flavoured/mixed lager category, off-premise retail sales were up by 23% in 2015.

Yet, even if it is a growing trend, craft beer and crisis seem to be related. How?

Well, during a crisis, people have less disposable money for entertainment. And, while it’s true that traditional beer sales seem to lower during a crisis, home alcohol consumption increases.

Having less money to consume on entertainment, in addition to higher consumption at home, means that people will look for quality more than quantity, and for products that will provide an experience at home.

Craft beers can do this.

Varying the conditions on how the beer is produced will change the taste, meaning that each brand of craft beer can be very different from another, providing the user a distinct experience.

Also, producing beer is relatively easy compared to wine. There is no need for land, infrastructure or sophisticated equipment. You can sell beer through distributors or online.

And as people lose jobs during a crisis, generally, it’s a business that doesn’t need much capital to start off.

Plus, in the last few years, there has been a growing trend for healthier and locally produced goods. Craft beer usually has a smaller footprint than larger beer makers, and consumers looking to support businesses that use local quality ingredients will often turn to craft beers.

Craft beer is in the middle of a revolution, growing at 20% per annum worldwide.

It’s a growing trend, but also a business thriving during economic turmoil.

Regards,
Selva


A brand new ‘crisis proof’ sector

As Selva points out above, a few select companies within a few select industries not only survive severe crises, they actually thrive because of them.

She notes that the rum and craft beer industries are among those rare sectors. Though not every stock in that sector will thrive in a crisis. You still need to get in on the right companies with the right management.

I’ll go out on a bit of a limb here and add the budding cannabis industry to the privileged list of crisis proof — or at least crisis resistant — sectors.

Now, cannabis stocks didn’t exist the last time developed markets suffered a major crisis. So, I don’t have the empirical evidence to back this claim. But I am convinced that the demand for both recreational and medicinal marijuana will continue to grow, even in the face of a broad stock market crash.

Again, that’s not to say every ‘pot stock’ will be resilient. But the best of them will continue to supply their consumers with a product that will remain in demand — possibly even more in demand — when the debt bomb goes off and markets head for the elevator. Meaning as the rest of the market tanks, these stocks could remain well in the black.

You can find three of the most promising cannabis companies here.

Cheers,
Bernd