However, while the recent market price action has the feel of a virus that will wipe out large swathes of the global population, available data suggests this is an unlikely outcome. A more likely outcome is that the economic impact will be transient, in which case there is the possibility of an economic recovery in the second half of the year.
Central banks and federal reserves are already charging to the rescue with both fiscal and monetary policy in a bid to stimulate markets. In the short term this will have little impact as lower interest rates don’t stop you from catching the coronavirus. However, once the Covid-19 position has stabilised, this stimulus will serve to persuade investors back into risk assets as nobody wants less than one percent per annum for giving the US government your money for the next three decades.
When markets sell off in the way that they have in recent weeks, investors believe that their portfolios and markets as a general concept are directly comparable. This is a misperception. The asset allocation in portfolios typically include other asset classes like bonds, cash, offshore assets and property. While all portfolios will feel the effect of the recent sell offs, it is unlikely to be a one-for-one scenario.
Investors that have had higher equity weights will be most affected but should have had high equity weighting on the back of a risk tolerance which allows them to absorb the volatility. Although the ZAR has seen a sell-off, many portfolios will either have a direct or indirect exposure to non-ZAR assets and this will have provided a degree of absorption against the equity market sell offs in base currency.
In this environment, the overall portfolio plan becomes vital. Essentially, the construction of portfolios should appropriately reflect the investor’s risk tolerance. Or, in other words, the portfolio’s ability to absorb volatility and the time horizon for the portfolio.
The required time horizon is key at times like this. Markets have sold off before – as they will undoubtedly do again in the future. Over time they tend to recover. At some point the monetary and fiscal responses being made will have a positive impact. However, the big risk for investors is to exit the market after the downturn but before any recovery, which means they cannot recoup any losses.
Winston Churchill is credited with saying, “Never let a good crisis go to waste.” In a similar vein, market dislocations like this create opportunity. History shows us that in many instances market corrections create opportunities to deploy cash – either within funds or outside of the investment portfolio – into attractively priced assets. Investment portfolios that have been holding cash or bond balances have an ideal opportunity to take advantage of this.
The best advice for investors right now is not to react from a position of fear or anxiety. In fact, hold off from any selling and for the brave at heart, watch out for any good buying opportunities.
