By Ashley Horwitz
We have entered unchartered territory in financial markets as governments, companies and individuals grapple with the impact of the coronavirus (COVID-19) pandemic on a humanitarian level and how this will shift the global economy.
Below is a summary of views from our various asset managers which collectively establishes our investment recommendation during this time.
Global financial markets have continued to decline in the last weeks, leading investors to reassess expectations for the future, especially in light of the disruptions caused to supply chains and reduced economic activity due to travel bans and social distancing.
We know that crises and disasters cause short-term financial market volatility. In this instance that volatility is extreme and widespread. As we continue through this period of heightened uncertainty, knowing what to do with savings and retirement planning becomes increasingly difficult. During this time, it is important for investors to remain calm and remain focused on their long-term investment objectives and financial planning goals.
One positive takeaway is that the situation in China appears to be stabilising, with the rate of new infections reported by the health authorities falling. Temporary treatment clinics in Wuhan have been shut down as people have begun to recover. For now, it seems China may be past the point of maximum pessimism as the government switches focus from fighting the virus to getting the economy back on track, which could influence the return of some positive sentiment in the Chinese market at least.
For broader market positivity, we may have to wait until we see evidence of infection rates in other parts of the world similarly shift from growth to decline.
In general, investing is not a smooth journey. There will be ups and downs, twists and turns as well as breaking news on a new crisis. It’s no surprise that investors panic when investment performance is at its lowest and no recovery appears to be in sight. Research shows that, on average, investors’ emotions lead them to make poor investment decisions and underperform the markets.
Source: Alexander Forbes – 19484-Flyer-2020-03
Ninety-One (previously Investec Asset Management) has looked back at their 2008/9 experience, to illustrate the benefits of long-term investment and why making emotional decisions in these times of heightened fear may not be prudent.
While no one can say for sure where we are in this downturn, we do know it has been severe and many investors are now looking for the door.
Most investors are asking themselves the following questions
- Are they too late to switch out?
- Or, if not, when will they come back into the market if they switch out now?
As part of their research Ninety-One outlined 4 scenarios using their Global Franchise Fund:
1. Stay invested, ride out the correction.
Ø Purple line.
Ø Fully recovered from market highs within less than two years.
2. Switch me to cash, the markets will never recover.
Ø Gold line.
Ø Lock in the loss, permanently and destroys capital.
3. Switch me to cash, I’ll time when to go back in. Ø Pink line.
Ø Switched to cash at the bottom and reinvested one year later, missed out in the turnaround in markets.
4. Switch me to cash. (pre-correction)
Ø Blue line.
Ø Did not suffer the drawdown but likewise, did not participate in the upside.
The Consensus view amongst our asset managers is as follows:
- They believe that the current market volatility is going to last for at least 6 months.
- Opportunities lie with companies who can maintain their top line revenue and have clean balance sheets.
- China is going back to work slower than expected – but are coming back!
Our conclusion is simple; we remain convinced that by maintaining level-heads, common sense and discipline, we will get through this period of heightened uncertainty within a few months. Importantly, we urge our clients not to liquidate their investments in the midst of the panic selling. Markets are capable of enduring this crisis and emerging on the other side bruised but not beaten.
As always, please feel free to contact us should you have any questions or concerns.