The only other historic time period we examined that offered a significant factor out-performance was the six-month period following the terrorist attacks of September 11, 2001 when high momentum stocks beat global markets by 7 per cent, even while those broader markets rose significantly.
This suggests that momentum strategies (those that invest in stocks that have recently done well) may outperform other strategies once the COVID-19 effects have dissipated and markets return to normal behavior.
The global financial crisis, which had the largest drop in equity markets of the three crises we examined, had no significant outperformance or underperformance for any of the factors.
In other words, it largely did not matter what strategy was followed or which factors were invested in: all portfolios suffered similar losses.
Historic Scenario | Considerations | Market Lesson / Impact |
Chinese equity crisis 2015 | Direct impact to China with economic contagion and fear spreading globally | Low-volatility and dividend-paying stocks lost less than others |
September 11 NYC Terrorist Attack | Direct impact to US with economic contagion and fear spreading globally. | Momentum stocks did better than the market in the 6-month recovery period |
Global financial crisis | Direct impact to all countries | No strategy or factor gave meaningful protection: all portfolios lost similarly |
COVID-19 has spread to be a global disease with over 50 countries reporting confirmed cases according to the World Health Organization (WHO).
Markets around the world are falling and businesses in each country and sector are being affected – no one is immune.
For these reasons, it is more similar to the global financial crisis (2008) than to either the Chinese equity crisis (2015) or to the September 11 terrorist attacks.
Unlike the global financial crisis (GFC), which only directly affected financial markets but not people’s ability to go to work or company’s ability to physically produce products, COVID-19 has the potential to shut down entire swaths of industries and therefore may have an even larger impact on global markets.
At this point, we can not rule out equity losses of more than 50 per cent.
Large downturns like these often see securities’ prices dropping together in lockstep, regardless of the companies’ fundamentals, profit or potential.
Known as “correlations going to 1”, this was last seen during the GFC when virtually every security moved in tandem with every other security: straight down.
In such a scenario, no sector, country or factor is safer than any other.
What can we expect from here?
As of 1 March, governments around the world are starting to prepare people for containment measures.
UK Secretary of State for health and social care, Matthew Hancock, describing the government’s plans to battle COVID-19, said that “nothing is off the table” and that the emergency battle plans include banning large events, closing schools, dissuading people from using public transit and urging people to work from home.
If other developed governments follow suit, productivity, sales and profits from all companies worldwide may suffer a sustained and prolonged retraction before the virus runs its course.
Fast course: The V-shaped recovery
Reports from China indicate that they may have reached the peak of new cases, as those numbers are now declining.
