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Watch out for the double-dip

by , 08 April 2020
Watch out for the double-dip
When is the right time to buy our market for the recovery?

That's the question I bet everyone's been asking.

We all know how lucrative buying the bottom following the 2008 financial crisis was…

And every investor certainly wants a repeat of that performance.

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Five penny stocks for crisis profits
 
How to pocket up to 30% from this ‘sure thing’ amidst market chaos
 
How this coal miner is keeping the lights on during the corona crisis!
 
Á buyout is imminent, savvy investors stand to make a sweet 60% when it happens
 
A transport company that’s about to boom
 
A golden opportunity to make as much as 70% with the high gold price
 
These are my five defensive penny stock plays that could make you richer despite the market crisis. You can claim your preview here
 
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Is now the time to buy the bounce?
 
Since 19 March 2020 the JSE All-Share Index has bounced 22% from a low of 37,963 to its current 46,562. In January we sat at 59,099.
 
That means a recovery back to January levels could see you make a further 27.5% gains!
 
So is this the best time to jump back in for a recovery?
 
Well, let’s review the facts in front of us before I answer your question: 
 
Why did we crash this badly in the first place? The crash happened as the fears of a global lockdown due to Covid-19 hit.
 
Investors panic selling caused asset prices to drop, which caused margin calls on other investments, causing further panic selling.
  
Has the market dropped simply because of fear, or is there more behind this? Fear and panic were the drivers behind the initial crash. 
 
But we have to be realistic. 
 
Right now, there is a reason why many share prices are low. After all, people have been unable to go out to restaurants, buy clothes or travel.
 
This will impact  many companies bottom line, and the real reason for the stocks to be ‘revalued’ at lower levels.
  
The market rebound comes as new infections slow down – New infections in South Africa has slowed down, and this clearly creates the hope that the lockdown won’t be extended further than the initial 21 days.
 
A slowdown in testing = a slowdown in new cases
 
 
 
Source: NICD
 
The problem is that as you can see there is clearly a slowdown in testing – starting with the beginning of the lockdown.
 
So, in as far as I can tell, the risk is there for one of two things to happen:
 
1. Testing will be ramped up, and there will be a spike in documented infections, leading to political pressure for an extended lockdown.
 
2. The lockdown will end, but cautionary measures will still be in place. This could lead to a further spread of the virus, and hence create a second spike in the numbers and a second lockdown period.
 
This problem is because, in the words of Minister of Health Zweli Mkhize, “Our testing criteria are reactive and restrictive. This means we don’t have a true picture”.
 
What I get from this is that the restrictive regulations regarding free movement will not be lifted soon, even if the 21-day lockdown comes to an end. And that means further damage to our economy. 
 
SA is now graded as JUNK by all credit ratings agencies – SA has been downgraded to junk status by all of the three big credit ratings agencies. It’s seen the rand crash, currently sitting above R18 to a US dollar.
 
This isn’t hurting us yet. But once restrictions are lifted and we start importing oil fullscale again, it will be inflationary. That means upward pressure on our interest rates – or further rand weakness. 
 
The SARB expects a historic budget deficit – The SARB notes in its latest Monetary Policy Review that it expects SA’s largest budget deficit in history to occur this year. In February our budget deficit was forecast at 6.8%, following the lockdown it is believed it will be much bigger. The largest deficit in history before this was 11.6% of GDP in 1914 coupled with a 60%+ debt GDP ratio it is bad. What does this mean?
 
Well, let’s consider it this way…
 
You earn R500,000 a year. Your bank overdraft account sits at R300,000 currently. Worse still, your expenses sit at R550,000 for the year. So your debt will now grow to R350,000…
 
Unless you increase your income, or drop expenses significantly in the following year you are going to really struggle paying your debt.
 
Whether you believe Covid-19 infections will get worse or not, it doesn’t matter. There will be further economic hardship in SA.
 
Some of it due to the virus, and some of it simply due to bad government policy and low growth that’s been coming for ages (and we’ve spoken about it for a long time).
 
 
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Since the Coronavirus Outbreak these Gains are Pouring in... 51.57%... 323.00%... 15.80%... 44.10%...114.29%
 
Often in a Matter of Days!
 
And you could have made these gains from the smallest market moves – DOWN or UP!
 
 
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A second dip in the stock market is very likely
 
Considering the facts I’ve already mentioned, I expect that the rapid recovery of half of the losses our market has made could again be wiped out.
 
Simply put I expect the economic realities of what we’re now facing to hit home soon, and this’ll create a second crash of 10% - 20% from current levels. 
 
Make sure you invest in the right investments
  
Right now I’m working on a report detailing the companies that’ll survive and thrive through this crisis. In some cases investments can be insulated from further downside. In fact, there are companies that could actually GROW profits despite (or thanks to) Covid-19…
   
But beware – there are businesses that will not make it through all of this.
      
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares  
 


Watch out for the double-dip
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