Investments to Avoid in the Next 12 Months
As coronavirus fears spread, countries the world over are feeling its effects. Among the countries hardest hit so far are China, South Korea, Iran, and Italy.
To stop the spread of the virus, many countries with the U.S. leading the way, have imposed travel restrictions the world over – with obvious and a not so obvious impact on the economy and a variety of industries.
The industry that first comes to mind when thinking about the negative economic impact of the coronavirus and related travel bans is travel & tourism.
With the government warning to avoid cruise ships and long flights, airlines and cruise ships have been pummelled. The avoidance of travel has led to convention and event cancellations from coast to coast.
Mark Zandi, chief economist for Moody’s Analytics predicts that the travel and tourism impact from coronavirus could be greater than the fallout from 9/11, or the 2003 SARS outbreak, because of the global nature of the crisis.
The downturn in the travel and tourism industry has had a direct impact on the hospitality business.
With mounting conference cancellations and corporate travel restrictions, hotel demand has been rocked. The spread of the coronavirus threatens to make this year the worst-performing year in U.S. hospitality companies since the Great Recession.
Hotel share prices have reflected this gloomy reality. Marriott shares dropped 22.6% from Feb. 19 through Tuesday of this week, compared with the S&P 500’s 11.3% decline. Hilton and Hyatt’s shares slid more than 17%. The Dow Jones US Hotel & Lodging REIT Index fell 19%.
Beyond travel & tourism and hospitality, other industries are also poised to take a hit in the next 12 months.
Consumer-interactive industries such as retail and banking and industries that rely on large workforces such as manufacturing will also be hit. Industries that depend on foreign-sourced goods and labor will also be impacted.
The U.S. retail sector will be hit by both demand and supply-chain issues. Declining consumer confidence, severe declines in retail-traffic declines, and even temporary store closures may have a substantial impact within the next 12 months.
The tech industry that relies on foreign workers and supplies is poised to take a big hit from the effects of the coronavirus fears. Tech’s reliance on the global economy, along with its use of cheaper overseas manufacturing, are now major stumbling blocks.
The economic fallout will stretch well beyond canceled conferences and declining stock prices. Some say the outbreak could cause lasting damage to companies’ global supply chains, slowing product cycles, and manufacturing.
With heavy reliance on international partnerships, a globalized workforce, and with employees from all over the world who often travel to and from affected countries, the tech industry will be hit hard in the next 12 months.
The entertainment industry is already reeling from the pandemic, with many movie releases pushed out for six or more months because of the inability of its stars to travel to promote their movies. Many music festivals and concert tours have either been postponed or canceled, with many sporting events also being threatened.
For obvious reasons, investment in any of the industries or stocks related to the industries listed above in the next 12 months is highly discouraged.
While the broader economy will be on shaky ground in the next 12 months, two industries will be recession-proof:
- The first is healthcare, where demand may move in the opposite direction as the rest of the economy as demand for care and facilities increases with the spread of the virus.
- The other industry poised to ride out the coronavirus impact is real estate – mainly commercial real estate, where values should remain steady, due to a variety of reasons.
Although the economy will take a hit in the short-term, its underlying fundamentals are still strong.
Commercial real estate typically involves long-term leases, so companies will not likely abandon these leases within the next 12 months because they will expect the economy to rebound at some point.
Finally, because of the illiquid nature of real estate investing, real estate values are not susceptible to the same market runs seen in the Stock Market.
Real estate’s fundamentals and insulation from the broader markets explains why while the Stock Market has dropped 19% in the past month, real estate has remained rock steady.
Real estate values are largely insulated from market swings because real estate is mostly illiquid. It can not be bought and sold on a whim or at the click of a screen. It’s this illiquidity that protects investors from themselves.
Commercial real estate is even more insulated from the broader markets than other types because most commercial real estate is owned through corporations and partnerships with long tie-up periods for their investors.
Private investment funds, for example, have investment windows of 5-12 years. This lockup period prevents investors from acting on impulses as investors do on Wall Street.
This prevents mass selloffs in actual real estate holdings in contrast to the mass selloffs of real estate stock like what has occurred in the past few weeks.
For all of the reasons listed, tangible real estate will be a solid investment for the next 12 months as it offers certainty in a time of uncertainty.
Add to that expected lower interest rates from the Fed to combat a downturn, and you have a recipe for higher demand.
Finally, commercial real estate particularly will be poised to deliver consistent cash flow and predictable appreciation, even in a downturn in the next 12 months.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.