These are the 3 best trades to help protect investors from coronavirus turmoil, UBS says
- Global stocks are sinking as investors worry about the spread of coronavirus into countries across the world - a development that could damage economic growth.
- Mark Haefele of UBS Global Wealth Management is telling investors to look at three trades to limit their losses and benefit from economic and market shifts in response to the epidemic.
- Concerns about the spread of the disease to the US pushed the S&P 500 and Dow Jones industrial average to their worst losses since February 2018.
- Visit Business Insider's homepage for more stories.
The spreading coronavirus outbreak has done a number on global stocks in recent days as investors grow more fearful that the epidemic will grind the global economy to a halt.
Cases have now been found on every continent, with more than 80,000 people infected and at least 2,700 killed. Mark Haefele, chief investment officer of UBS Global Wealth Management, says it will soon become clear if governments in the US and Europe will take drastic steps to limit the spread of the illness.
"Given the incubation period of the virus, the next two weeks will be critical in determining the extent of the outbreak, the steps authorities are willing and able to take to contain it, and the economic effect of those measures," he wrote in a note to clients.
As it is, Haefele says, the spread of the virus to Europe could crush consumer and business confidence, and more cases in North America could have that effect as well. That's after the two worst days for US indexes in two years.
With that uncertainty hanging over the public and markets, Haefele says investors should consider these three strategies to find safer areas of investment and take advantage of a few potential beneficiaries.
(1) Emerging markets over Eurozone
The virus has hit China far harder than any other country and its effects could ripple through Vietnam, Thailand, and a slew of other developing countries in Asia. Still, Haefele thinks emerging markets offer much more opportunity - that is, provided the outbreak in China is brought under control over the next few weeks.
Haefele says there are signs that's happening, but even as China makes progress, uncertainty throughout the developed world is rising. That comes at a time European stocks are unusually expensive, he wrote.
"The market trades on a 12-month forward price-earnings ratio of 14.8 times, at the upper end of the 15-year range, at a time when we expect earnings to contract 1% in 2020," he said. "Now, the added economic threat posed by the coronavirus and containment measures presents another potential downside risk."
One way to invest in that theme is an ETF such as the iShares MSCI All Country Asia Ex-Japan index.
(2) "Stay at home"
Travel stocks like airlines, cruise lines, casinos, and hotels have already been hard hit. Haefele says there's a corresponding opportunity in companies whose products and services can serve as alternatives to going out.
"Invest in "stay at home" stocks-in sectors like e-commerce, gaming, and food delivery -which we would expect to see increased demand in case of quarantine measures," he said.
Investors who want to attempt that strategy can do so with ETFs such as the VanEck Vectors Gaming ETF or the SPDR S&P Retail ETF.
Haefele also uses 'stay at home' figuratively, saying it's a good idea to find stocks with sustainable dividends. In addition to their dividend returns, they could appreciate in value in the wake of the recent drop in bond yields.
(3) Make volatility your friend
Market volatility has skyrocketed in the last few days and hit long-time highs in Europe and in the US. The fallout has been painful, but Haefele says investors can take advantage of that by selling put options, a tactic that involves agreeing to buy a stock from another investor at a future date - if that investor chooses to sell.
Done correctly, those sales can generate income for investors while giving them a chance to buy a stock they like at a more affordable price.
"This move in volatility increases the yield available from put-selling strategies, which can enable investors to take advantage of higher volatility while offering a more defensive exposure to equities," Haefele wrote. He adds that structured products can achieve a similar effect.