Rigged! How to Invest in the Lockdown Economy

In today’s Money Morning…three reasons why the ASX has nothing to do with economic health…here’s where to invest in a rigged lockdown economy…the game is rigged, but you don’t have to lose…and more…

Sure, the risks are rising, and many think we’re getting closer to the precipice where the ASX just collapses in a heap.

But yesterday, Ryan Dinse noted that relative to money supply, indices could have a serious run left in them before they peak.

To the average person — it’s completely fair to find the ASX moving up in an economic downturn super confusing.

I thought there were 14.5 million Aussies in lockdown…

How can these companies rake in the cash with great earnings when most people can’t even spend?

Well, the sad news is that the whole system is rigged in favour of companies with economies of scale.

Survival of the biggest — doesn’t matter if they are well run or not.

You’ve got the untouchable banking oligopoly (Big Four) and their ability to hold the country’s property market hostage, the construction companies backed by Big Super, and a handful of big tech companies that just need the internet to survive — physical obstacles aren’t an issue.

There are plenty more protected species out there, too.

For proof of this, just look at the toilet paper rally Woolworths Group Ltd [ASX:WOW] staged last year:

This is what happens when the government decides you’re the only business that can operate.

Never before have we seen such a concentration of spending at the top end of business.

By one estimate in March, some 5,000 Aussie businesses were set to go under. And that number could be significantly higher now given, well…you read the news.

Which means we’ll see a really high concentration of bankruptcies at the bottom end of the business food chain.

The fund managers know this is the case, and it’s why they are quietly confident the ASX could keep moving up.

Just take this fundie, for example…

Three reasons why the ASX has nothing to do with economic health

It’s a bad thing when an index is totally disconnected from the health of the host economy, but this is the way it is.

Mark Freeman of Australian Foundation Investment Company hits the nail on the head:

‘First, this isn’t like 12 months ago, when investors could only hope that effective vaccines would be developed to get economies open again. Australia’s vaccine rate may be far too low, but the market knows it will eventually rise and the experience of 2020 says the economic rebound could be swift and powerful.

‘Second, equities remain attractive in a world of ultra-low interest rates. Even if inflation eventually forces rates higher, “the reality is they are incredibly low and people just don’t have anywhere else to put their money”.

‘Third, and perhaps most importantly, listed companies are not feeling the same level of pain as smaller businesses that bear the brunt of economic shutdowns.

‘Freeman points out that about 40 per cent of profits of companies on the ASX are generated offshore, insulating them from the worst of the lockdowns.’

Sad truths, yes.

But are you, as an investor, helpless?

Absolutely not.

Here’s where to invest in a rigged lockdown economy

Knowing the big companies on the ASX 200 [XJO] are largely untouchable, it could be tempting to buy the index and sit back while the big dogs’ earnings roll in.

An easy no-brainer for those seeking a safe small win in a short time frame.

But what about the companies that can provide solutions to small companies in their time of need?

Think about added efficiencies, new ways of doing things — products and services that give smaller companies an edge in a competitive environment that is working against them.

Small companies are desperate for this type of solution.

This is where the innovation happens and where you could find serious investment opportunities.

One such opportunity we’ve identified in Exponential Stock Investor has around half its market cap in cash, has money coming in via positive EBITDA, a huge partnership to help it grow its customer base, and, best of all, a service that can drastically improve the cash flows of stranded small and medium enterprises (SMEs) that are getting left for dead by the rigged system.

This is the model for picking stocks as the economy goes one way and the index goes another.

And if you’ve ever wondered what goes on underneath the hood at Exponential Stock Investor, you can learn more right here.

Just because the game is rigged, doesn’t mean you have to lose.

Regards,

Lachlann Tierney,
For Money Morning

PS: Lachlann is also the Editorial Analyst at Exponential Stock Investor, a stock tipping newsletter that hunts for promising small-cap stocks. For information on how to subscribe and see what Lachy’s telling subscribers right now, please click here.