Why do I think you should focus on Macquarie Group Ltd (ASX: MQG) shares in the next market crash? Let me explain.
Macquarie Group is an ASX banking share, often described as the 'fifth ASX bank' behind the big four like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). Yes, Macquarie does offer many of the banking services that the big four do, like savings accounts, term deposits, mortgages and personal and business loans. However, these activities make up a relatively small portion of Macquarie's total earnings (around 14% in FY2020).
Macquarie is more of an 'investment bank' than a retail bank like CBA or Westpac. Most of its earnings these days come from 'annuity-style' businesses like funds management, and institutional investing services like access to financial hedging and commodity trading. It also has a 'Macquarie Capital' division, which assists companies with processes like listing on share markets and with mergers and acquisitions.
Also unlike the other ASX banks, Macquarie benefits from massive geographic diversification of its earnings base. In FY2020, only 33% of its earnings came from the Australian market, with 25% coming from the Americas and 29% from Europe, the Middle East and Africa.
Why buy Macquarie shares in a crash?
So, considering all of these factors, why am I keen on buying Macquarie shares in a market crash or a bear market?
Macquarie (like most banks and financial institutions) is a very cyclical business. It tends to make money hand over fist during good economic times, but struggles in the not-so-good times.
This means that its share price tends to reflect this reality. As an example, the broader S&P/ASX 200 Index (ASX: XJO) fell 36.5% between 20 February and 23 March this year. It also rose 35% between 23 March and 9 June.
In comparison, the Macquarie share price fell 52.5% between 20 February and 23 March, and rose 72.73% between 23 March and 9 June. That's what you can expect from growth-orientated shares in a bear market and subsequent bull market – underperformance followed by overperformance compared with the broader market.
Now Macquarie is a high-quality business that has been around for decades. It survived the 2008-09 global financial crisis intact and has even taken steps to fire-harden its earnings base against future financial shocks by focusing more on its annuity-style businesses in recent years. As such, I think this is a great company to focus on in any future downturns.
Foolish takeaway
If Macquarie can survive the GFC, I think it can survive anything. As such, I can't envisage a scenario where Macquarie is in real trouble, or at risk of bankruptcy, in a downturn.
Therefore, I think this is a stock you should seriously put on your watchlist in time for the next crash. At $131.39 a share (at the time of writing), the shares don't look too cheap today in my view. However, picking them up in March for around $70 would have been a great buy. Keep that in mind next time investors sell off this top-notch bank.
