This year looked like being a year of relative calm for markets.
Brexit was on the way to being sorted, global growth was solid and the financial system seemed OK, despite record levels of debt. Valuations were not cheap, but with accommodative monetary policy, so what? Less than three months in and the outlook is rather different as coronavirus grips the global economy.
The key question is what should investors do in response to market falls? It is easy to say do not do anything in reaction to recent events, but largely, most people should indeed avoid knee-jerk reactions.
With markets falling so sharply it does not give time to change approach – they have already fallen, so derisking and going to cash simply locks in those recent losses. The other issue with going to cash is when do you go back into the market?
You might get lucky and call the bottom of the market, but even if you do, will you be brave enough to invest at the time of maximum pessimism? Invariably, ‘no’ is the answer. That is why, in my view, remaining invested is the logical approach for most investors.
I appreciate that it is hard for clients not to panic when their life savings are falling 10 per cent in a day, and maybe 30 per cent to 40 per cent in a matter of weeks, but you should not allow fear to dictate your investment strategy. Which is why I would not do anything, apart from topping up a few favoured holdings at much cheaper prices than they were a few weeks ago, if there is cash lying around.
Quite clearly I am making the assumption that coronavirus will have a relatively short-term impact on companies, economies and markets, and not a permanent one.
This year will be poor from a gross domestic product perspective and will probably push many countries into recession. Whole populations could stop spending discretionary money and just stick to the essentials. But the minute the virus is under control, normal and pent up spending will resume.
- With markets having already fallen it is too late to alter investment approaches
- Pulling out of investments is not necessarily the right thing to do
- Separating the ‘false bottom’ from the real bottom of the market will be key
The recovery both from a stock market and economic perspective will more than likely be V-shaped. Just look at how well Chinese funds performed last month as the markets started believing that Beijing’s measures had brought the virus under control.
Looking back in history, for some strange reason March often seems to be the month for market bottoms; it happened in 2003 and 2009. The problem with comparisons is that most sharply falling markets have been down to economic conditions and not health scares.
2003’s market recovery came on the back of three years of falling markets following the bursting of the dotcom bubble. 2009 saw markets rally in response to huge stimulus to avert the collapse of the global financial system. In both cases, however, there were several false bottoms and dead cat bounces before finally buyers were enticed back in.