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Fear In The Markets: The Smart Investor’s Response


Financial markets are delicately balanced


Which way will they tip?

Imagine our current volatility as a weighing scale. On one side are investors, fearful for the global economy and wondering how much worse the virus will get.

On the other side, we have the measures taken by authorities around the world. These include control and limitation measures to limit viral spread, monetary stimulus to lower the cost of corporate debt and fiscal stimulus to support vulnerable consumers through this challenging period. The authorities have not held back so far, with the US Federal Reserve cutting interest rates to zero and the European Central Bank increasing quantitative easing. Attention is now focussed on how much fiscal stimulus governments will inject.

Investors eagerly process each new bit of information. When the implications of a new development are unclear (as in the case of coronavirus), they may well feel that the only safe option is to sell now and figure it all out later. We should therefore expect markets to be choppy and volatile in the short term, as further news breaks about the virus and its economic and financial implications.

Three themes to guide investors over the coming months

One of the worst things an investor can do right now is sell all, or even a substantial chunk, of their equities – especially if they’ve already suffered significant losses.

In volatile times, market movements tend to be larger than normal – up as well as down. So, if you’ve cashed out, you risk missing out on large gains upwards. In fact, missing even one day of major gains can be damaging. According to data from 2004 to 20142, portfolios that missed out on the top 20 performing days during this period would have been significantly harmed.

Whereas “timing the market” is notoriously difficult, the right strategy is, in fact, to focus on “time in the market”.

2The period 2004 to 2014 was selected because it includes the Global Financial Crisis and European Debt Crisis, along with other volatile periods.

Since traditional safe-haven assets like core government bonds are so expensive, there’s nowhere cheap or easy to hide. We’ve already mentioned investment grade corporate bonds as an alternative, but it must be stressed that since these bonds are issued by companies and not governments, they do have a higher correlation with the stock market.

Because of this, investors should consider additional ways of diversifying. Alternative investment strategies, which aim to deliver absolute returns uncorrelated to market conditions, should be considered if available.

Gold is another asset that traditionally performs well during volatility, although prices are currently very high, making it hard to be bullish. But gold is still a useful store of value in times like these and we expect prices to be supported by even lower interest rates and continued short-term volatility.

If neither of these approaches is readily available, a more traditional multi-asset portfolio approach, where investment decisions are made by full-time professionals against your risk target or budget, would be a smart option amid the current uncertainty.

With uncertainty comes opportunity. This matters to long-term investors because cheaper entry points to global equity markets now exist. This means that long-term prospective returns on equities are now higher than they were before, making them more attractive for investors with a longer-term time horizon. Remember that it’s extremely difficult to time the market and call the absolute bottom so it’s worth considering the opportunities.

Within equities, we think that Emerging Market (EM) equities, particularly in Asia are especially attractive from a long-term perspective. Emerging Markets have more scope for policy action than, say, the Eurozone and Japan, and indeed we’ve already seen authorities in China and other Asian markets take aggressive fiscal and monetary action to support the economy. Lower energy prices should also help EM markets that are “nonpetro” economies.

Because Asia was forced to confront the coronavirus a few months before the rest of the world, the continent is arguably closer to returning to some semblance of normal life. This can only be positive Asian economies and, correspondingly, for EM and Asian investments.

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