Coronavirus: Market commentary

Global markets continue to experience some of their biggest moves in recent history compounding a tumultuous period for global equity markets over the last 2 to 3 weeks.

Whilst markets have been grappling with the Coronavirus (COVID-19) there has been the start of an oil price war that has added to a market under pressure.

As the spread of coronavirus is felt on a global scale and we reach pandemic levels, we are faced with somewhat uncharted territory when comparing to previous outbreaks. Whilst comparisons have been made to the SARs and the Spanish Influenza, the former was not as widespread, and the latter was during a period where financial markets were not as inter-connected.

As we navigate this unknown it has unsurprisingly caused uncertainty in the markets as investors attempt to analyse the potential impact and current asset prices. Whereas markets had initially underestimated the potential threat posed by Coronavirus its effects are starting to be seen in our daily lives. We have seen occurrences of panic buying, employees self-isolating and more recently a complete lockdown in a number of countries across the world.

How bad is it?

A sudden shock to markets can lead to emotions of distress and panic, but panic-based rash decision making is rarely your friend in such situations and is often a recipe for disaster. Whilst historic data does not provide an indication of future performance, it can provide some perspective. As was the eventually the view with previous falls in the market over a 10+ year period, we believe this could also be remembered as a blip in 10 years’ time.

While market movements on this scale over a short period of time can feel intense at the time, a brief review of long-term equity charts often illustrate them as temporary blips that represented valuable buying opportunities.

That is not to say that some companies may not struggle. Those who currently hold weaker balance sheets within sectors that could be harder hit than others may face the reality of extreme financial stress that could result in bankruptcy.

Whereas some companies may experience tough times during this period, the message for investors still rings true. Investors should continue to take a long-term view, remain patient and disciplined and focus on the areas we can control. This contains creating a risk appropriate strategy that includes diversified portfolios that will recover and move to compound to new highs in the future, Investors who own companies with solid balance sheets which can weather these storms do very well over the long term.

Although there has been well publicised panic in the markets, it is also important to remember that there is a strong likelihood the panic has already been priced in. Whilst the perceived safe haven of lower risk assets can seem appealing when markets are volatile and selling may even protect from further drops, you effectively kick the risk down the road as the possibility of not buying back in at the right time comes into play.

The comfort of selling out of markets can often be short-lived as the repercussions of missing the boat on the way back up can do severe damage to the ability to generate wealth. Timing the market in this manner is extremely difficult and re-entry into the markets often occurs at higher prices which in turn erodes value.

As valuations become more attractive, good quality assets get significantly cheaper. As a result, selling at the bottom a market fall is considered one of the single worst mistakes an investor can make when markets suffer dramatic downturns like we are experiencing.

The graphic below illustrates how investors can still experience positive returns in a calendar year, despite experiencing significant short term losses (peak to trough ‘drawdown’) within that year, so long as they don’t crystallise their losses. The index used is the S&P 500.

What is our overriding message?

Our overriding message is one of viewing investment long-term and staying patient. This message is consistent and does change based on short-term fluctuations, good or bad.  Although often easier said than done during downturns in the markets, those who remain disciplined increase their odds of benefitting on the way up significantly. Time in the market has always been the greatest defence against increased volatility and its important not to weaken that defence with rash panic-driven decision making.

For those now reliant on their investments to support their income needs, the message remains to think long-term. Now may not represent the best time to draw benefits from your investments and therefore utilisation of cash in the short-term would be favourable.

Overall, our message delivered today is captured within our Investment Philosophy every day.

Don’t put your eggs in one basket

Diversification is at the heart of our approach and is widely considered an effective and measured technique to mitigate non-systematic risk.

Whilst there is inherent risk in every investment, these risks are not always clear and obvious. The use of a well-diversified portfolio allows investors to spread risk across various asset classes, industries and geographic locations, and reduces the risk of concentrated losses.

Our various investment partners may have differing opinions, styles and approaches, but all remain consistent in their aim to achieve long-term growth through the use of well diversified portfolios.

Think long term and be patient

As is true in life, the same can be said for investments – there is often no quick and easy method to achieve success. Although there will always be exceptions to the rule, we believe that patience in investing is definitely a virtue.

Warren Buffett, one of the most successful investors of his generation, once said, “The stock market is a device for transferring money from the impatient to the patient.” If you want to be a good investor, patience is key.

Be disciplined

Being disciplined goes hand in hand with thinking long-term and being patient. Whilst we understand this can be easier said than done, we believe it is vitally important to remain disciplined and not succumb to impatience, emotional decision making or paying too much attention to often irrelevant and inflammatory market noise.

The most successful investors understand that to generate good long-term returns takes time, patience and confidence in the long-term growth potential of global markets.

Our investment partners share this sentiment and stick to making rational decisions when constructing investment solutions. Decisions are based on stringent research and logic by market-leading experts.

For further advice during these uncertain times, please get in touch with one of our Independent Financial Advisers.