The global stock markets are in turmoil. There are rumblings from China, Europe and the USA. Are we in the middle of another crash – or is this just market turbulence? Whatever it is, we’ve seen this sort of thing before, and we should brace for the potential bear* market. It’s also just good business practice to be prepared for a downturn.
So with that in mind, here is what we potentially could expect to happen during the next few weeks and months and maybe (but hopefully not) years.
- A global sell-off in shares will continue off and on. Shares will go up, shares will go down. Nobody can predict what will happen but the drops and rises means that investors in all asset classes are going to be more fickle.
- Some companies with poor fundamentals (bad numbers, lousy products, poor growth, high debt, no customer lock-in etc.) will be exposed and some of them will go bust, as they will fail to raise equity and lose access to debt.
- “Growth” (smaller, earlier stage) stocks tend to get hit a lot harder than “Blue Chip” stocks during market falls. The conventional wisdom is that you want to own mass-market breweries and sell high tech. (Growth stocks have higher Beta – volatility versus the market – and so are hit harder on both the downside and the upside. Xero’s share price exhibits this extra-volatility versus the market)
- Valuation multiples (versus EBIT, Revenue etc) will fall, especially for growth stocks, which will in turn change rules of thumb for a while.
- In the high growth ecosystem in NZ this means that it’s going to be a lot harder to raise money for early stage companies that are not exemplary, because investors get scared overall.
- Meanwhile NZ as a distant and small market internationally may suffer from withdrawal of offshore funds.
- Early stage valuation multiples for companies will go down, because and some will fail to raise at all.
- It will be harder for funds with poor track records to raise money as well. On the other hand if you have a fund with lots of money then the investing will be good.
- Revenue per customer will be lowered by the general downturn in business and consumer confidence. The number of customers may drop, and the risk of slow or no payment events rise.
- M&A activity will occur, and at low prices.
- The NZ housing market is not immune to a general market drop.
Advice to businesses
Make sure you can get to cash-flow positive on the funds that you have. Nobody can be sure that the next round will be there, and if it is then the valuations might be horrible.
Operate with a margin of safety, and be able to cope with a downturn in customer growth, upturn in churn and lowering of per-customer metrics. This is no time for flaky start-ups, and customers won’t like that either.
Tweak your selling proposition by emphasising how you will help your customers survive and prosper through potential tough times, for example how you will help them save dollars and grow business.
Advice to investors
That’s a trick heading – I’m not allowed to give advice under NZ law.
Punakaiki Fund will always try to support worthy companies and we will very much want to have funds to invest during tough times.
We remain very positive about the strong fundamentals of the companies we have invested in (they have revenue based on helping customers save, grow and achieve better outcomes) and future investment opportunities.
*Bull Markets are when market sentiments are positive and prices are rising, Bear markets are when investor optimism turns into despair, as the prices fall. The trick is to be positive when others are most negative – and vice versa, as this ‘contrarian’ thinking is where the bargains are picked up as the market turns.