Let’s face it. This is a nightmare for any saver and investor. It does not matter how much money you have. Whether you are saving whatever you can scrape together for retirement or whether you are investing your hard-earned bonus to fund your children’s college tuition, the current market is distressing.
When stock markets fall 20%, rise for a day, only to follow it up with a new record one-day loss, it is impossible to remain impassionate.
The temptation is high to just sell it all or to “buy the dip”. There will, indeed, be buying opportunities soon, but timing the market is very difficult, even for the experts, and it will rarely produce the desired results.
So, what should investors do?
Markets are susceptible to world events and they are cyclical over the long-term. Monique Frederick, head of Asset Management at Butterfield, says in general “investors who are focused on their long-term investment goals, with the appropriate asset mix aligned with their time horizon and risk tolerance and are sufficiently diversified, are well positioned to ride out the inevitable economic cycles inherent to life.”
It is only by taking the long-term view, that financial shocks become manageable. There are no investors in the world who anticipated how quickly the coronavirus crisis turned into fully blown market turmoil.
After an initial sell-off in the first month of the year, stock markets reacted to positive indications in early February that the crisis would remain contained to China.
China is undoubtedly a very important market for the global economy, and certainly much more important than in previous crises, but the impact appeared manageable.
It was only when the spreading of COVID-19 became a global phenomenon, with outbreaks in South Korea and Italy, that markets started to reprice more sharply based on much more uncertainty around global economic growth and corporate profits.
The subsequent quarantine measures and travel bans to contain infections, compounded the uncertainty and are leaving an undeniable mark on the economy, not only by disrupting supply chains but by choking demand for travel and any kind of leisure activities.
The ripple effects are likely to be felt by every other industry. A global recession, which at the beginning of this year appeared possible but not probable, is becoming almost a certainty.
Scott Elphinstone, chief investment officer at Five Continents, says given that supply chains are extending world-wide, “we are experiencing significant disruption and a sharp decline in profits in virtually all large companies.”
He says the recommended strategy for the current situation is similar to good health advice. “Investors should treat their portfolio like their face in this crisis: don’t touch it.”
He says the sell-off has impacted the price of the highest quality companies the most, because they are the easiest to sell. By the same principle, their prices will also recover the fastest.
Butterfield’s Frederick makes the same point. “The panic in the markets is reminiscent of the 2008 market crash, but investors may recall that selling your stocks at that point in time would have prevented you from participating in the subsequent market recovery which is bound to take place at some point in time,” she says. “For clients with a diversified and long-term strategy we would not recommend selling equities at these levels; on the contrary, certain sectors may provide buying opportunities in the not so distant future.”
She says even before the coronavirus outbreak, heading into 2020, Butterfield de-risked portfolios in anticipation of lower growth and higher volatility.
A defensive positioning in multi-asset-class portfolios with exposure to gold, low volatility ETFs and a reduction in credit exposure helped to cushion the tremendous fall in equity markets.
Now, she says, “We continue to monitor the monetary and fiscal developments around the world while looking for buying opportunities when they present themselves.”
Expect more volatility
Financial advisors are unanimous in that the coming weeks and months will bring more volatility associated with the uncertainty surrounding the COVID-19 outbreak.
Alessandro Sax, portfolio manager at NCB Capital Markets, believes “headline” risk will persist and negatively impact markets in the short-term, as travel bans and mass quarantines dominate the media coverage.
But Sax also notes some positives. “Monetary policy, globally, is very accommodative, bond yields are at historic lows, and there is a high probability of increased fiscal stimulus as a response to the pandemic.”
Governments and central banks stand ready to respond with looser monetary policy and higher government spending to shorten what could be a long, severe global downturn.
Central banks around the world are lowering interest rates, expand asset purchasing programmes to stabilise bond prices and inject liquidity into the banking sector. Governments, meanwhile, have announced tax cuts, direct support of small and large businesses, and programmes for workers who are hit the hardest by the crisis.
A globally coordinated monetary and fiscal response would advance business and consumer confidence, Frederick says, and allow for a shortened period of uncertainty and economic stress.
Still, current events are unnerving for investors.
Elphinstone says, “Investing is about doing sensible things over a long period of time.”
Investors should have a plan that includes a target asset mix based on current and future financial needs and expectations. Now is a good time for investors to review their portfolio against that target mix and rebalance it if necessary.
Frederick says the current situation is also an opportunity for investors to revisit investment policy statements and make sure that the risk appetite is still appropriate.
“Investing is not about pursuing the greatest financial gain possible; it’s about pursuing a return that allows you to sleep at night,” she says. “If the interim volatility is unbearable it may be a sign that you may not be as comfortable with the potential risk in your portfolio compared to what you initially thought.”
If this is the case, changing the asset mix of an investment portfolio may be appropriate.
The same applies to any changes in someone’s financial circumstances. With new investment objectives, the best-suited assets for a portfolio may well change.
Conversely, Frederick advises investors, it is important to remain disciplined during these challenging times and to remember that allowing emotions to drive decision-making usually leads to less than optimal outcomes.
With emotions coming into play, particularly during times of panic and fear, investors who have the patience to stay put will find opportunities to buy assets below their intrinsic value, she says.
When is the market going to turn?
When living through a crisis that seemed inconceivable only a few days or weeks ago, it is easy to forget that it will not last forever.
“The good news is this is expected to impact only the next couple of quarters,” Elphinstone says. “We are seeing evidence today that China, where the virus first appeared, is starting to slowly return to normal.”
The Five Continents CIO expects financial markets to come back in the latter part of the year. This could happen in a matter of weeks and just as fast as the downturn arrived.
In the longer term, he says, the conditions in the economy, such as low interest rates, should support the price of risker assets like equities. While interest rates could rise modestly, they should still remain very low for a long-time, Elphinstone believes.
Sax agrees. “Although the world is currently at the mercy of the coronavirus and the ‘fear factor’ remains high, the stimulating measures by global central banks and governments should prove effective once infection rates taper off, setting the stage for a return to normalised economic activity in the second half of this year,” he says.
During the period of increased volatility investors should take a step back and focus on the long-term. “The constant flow of negative headlines and ‘unprecedented measures’ will eventually subside, and life will carry on,” Sax says.
Historically, investors who have been disciplined and opportunistic during similar times of market crisis have reaped the rewards once markets normalised.
“It is always important to remind ourselves of the many quality companies that make up the overall market,” he says. “Most are extremely resilient and have withstood multiple recessions, wars, flash crashes, the tech bubble, political crises, environmental disasters, heightened inflation, terrorist attacks, and the global financial crisis.”
What if I am just starting to invest?
For those new to investing, time is the biggest ally, says Elphinstone. They should start now.
“Come up with a plan and start investing a bit at a time,” he says. “In a week what you buy today might look awful, but in a year, this may turn out to be the best buying opportunity in a long time.”
The uncertainty surrounding the coronavirus crisis should demonstrate to investors the effectiveness of having a diversified portfolio approach, Sax says. Well-balanced portfolios can help dampen large market swings through a mix of equities, bonds, and alternatives.
“For those beginning to invest, my first piece of advice would be to check your emotions at the door to the best of your ability,” Sax says. “Do not invest blindly and have a clear plan that takes into account future unforeseeable market shocks. Regularly review your portfolio to make sure it reflects your appropriate risk-tolerance as well as needs for growth, income and liquidity.
“Lastly, if you feel investing is too overwhelming, seek the guidance of a trusted certified professional.”