Keeping a cool head during the COVID–19 lockdown
Whatever you do, do not trust social media and do not forward any conspiracy theories. You create fear where fear should not be. Rather read articles from legitimate sources and keep a cool head. Markets have fallen in the past and 100% of the time they have recovered, sometimes quickly and at other times taking a little longer. Do not let make emotional decisions.
Markets have fallen drastically over the past few weeks. This was even more of a shock, given that people were quite upbeat about the prospects for the year ahead. The COVID-19 pandemic has struck in all severity and the world is uncertain about what lies ahead.
This is not the first catastrophic event, nor will it be the last. However, this is not the end of the world and neither is it the end of the markets. Economic activity is slowing down dramatically and in some countries, like Italy, it has basically come to a standstill. Markets are looking ahead and fund managers are trying to forecast what the effect will be on company earnings, and are now trying to price for that.
History tends to repeat itself
What we have learned from the past is that markets always try and price for the worst case scenario, which almost never happens. During major catastrophies (9/11, wars, SARS and MERS, the 1998 crisis, and the crisis in the 80’s) the reaction is sharp and markets tend to wipe out massive amounts over a very short period. However, markets tend to recover sharply. It is often referred to as a V-shape as the curve is one of a sharp and almost straight downside, as well as a sharp upside, forming the shape. Other regular shapes are L and U, and they recover a lot slower and over longer periods of time.
Yes, this crisis is unique, but so were all the others. We honestly cannot predict the future and I cannot say how far we are from the bottom of this trough, but I do suspect we are close to the stabilising level. This means we might drop lower over the short term, but that the current levels mostly price in the current risk and probably even more. However, we do suspect that once a vaccine is developed, or it is announced that it is close to being developed, markets will again price in the good news and we will then see the second leg of the V-shape.
Markets will recover
Companies around the world are working non-stop to develop a vaccine and some forecasts are looking at July/ August for one that can be used. This is a possible indication as to when markets might start to price in the recovery. Once that happens, the bounce-back will be sharp and those who have sold out of the markets will miss the recovery.
Should one now switch out of the market, as many people want to do?
No, it is already too late. The moment that panic is highest, usually signals the bottom of the trough. To switch now means you have taken the brunt of the pain, but forfeit the opportunity to share in the upswing. An act like this simply locks in losses and denies the investor any chance of taking part in the recovery.
Why do we expect a market recovery?
Since the start of the pandemic, almost all countries in the world have started with some form of quantitative easing (QE), including lowering of interest rates, freezing debt repayments and lowering taxes. This creates a massive amount of liquidity in the market which might stimulate markets once the fear has subsided. A US and world recession could slow the recovery down, but the amount of measures taken by countries to keep economies going will see markets bounce back sharply once good news comes through. In the past, the year following such a major event often gave returns in excess of 20% and even 30%. The introduction of QE after 2008 by the US, has seen one of the most prolific growth periods in their history, and if something similar happens, markets might see a number of excellent years after this slump.
What should one do with new investments?
This is an excellent opportunity for new investments. The decision to go into or out of the market can be similar to comparing drunken driving with bungi jumping. To bungi jump feels highly dangerous, but it is actually fairly safe. To drive under the influence feels very safe, but it is highly dangerous. To move into the market at current levels is therefore like bungi jumping, it feels wrong, but the risks are rather low. Once markets do recover, the client will share in the upswing.
Whatever you do, don’t panic.
Source: Rocco Carr
INDIVIDUAL ADVICE: If you want advivce on your particular personal financial situation, Contact: Ebrahim Talia Tel: 011 839 4496 Fax: 011 837 7698 or ebrahim.talia@liblink.co.za
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