April 6, 2020

Covid conditions and Markets – 6/4/20

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Some Perspective On The Medical Issues

While daily updates in infection and mortality statistics of the virus relay its spread and impact, it is also a record of a global failure in disease control by way of alertness and population monitoring. The official one million mark of cases infected is somewhat misleading as these are the numbers of suspected cases who have tested positive for the virus. It does not include those in the global population who are asymptomatic and who are unwitting spreaders of it. The US has gone from testing 10,000 people a day to reputably 100,000 a day, although the Centre for Disease Control and Prevention (aka CDC) no longer seems to report its daily numbers. Importantly, Covid conditions and Markets seem to be improving because of this.

Testing and Covid Infection rates

However, with more testing comes a higher confirmation of infection. Nonetheless, the slow and disjointed national response of the US in leading its citizens to respect the pandemic and maintain social distancing could now see the death toll being in excess of 200,000.

Moreover, irrespective of the global location, the key medical issue worldwide is the level of healthcare such an infected group will receive, especially those with pre-existing conditions which makes them vulnerable to the effects of the virus.

The Current Economic Thinking

The relevance of the US infection numbers is important in terms of its financial position globally and its knock-on effect on other stockmarkets. So while the pandemic is primarily a public health emergency, it is also a financial one. Global business cannot expect to return to normal activity overnight.

However, whether a herd immunity occurs and or the vaccine becomes available globally, what was normal before may not be anymore. Covid conditions and Markets may stutter due to this however as people may be less inclined to go into packed venues such as pubs, restaurants and public events for quite some time. Tourism will be impacted upon  as it sees a slow recovery assuming that many airlines, hotels and venues are likely to fail first.

Chinese post-Covid productivity

Even though Chinese production appears to be on the move as evidenced by satellite monitoring of air pollution the economic impact of the virus will go back and forth across the world. Closure of non essential retail outlets in the West has led to huge cancellations of orders from international brand names to manufacturers in developing economies. Some of these nations are also seeing the value of their own currencies plummeting, forcing them to pay more for imported food and fuel while the pandemic itself threatens to overwhelm their mostly inadequate medical systems.

A “U” or “V” Shaped recovery?

The longer that economies stay shut down by way of social distancing and lockdown, the greater the probability that a “V” shaped economic recovery will turn into a “U” shaped recovery. Considering the growing recognition of the global economic impact there is likely to be further economic stimulus especially among the larger trading blocs which may see the possible outcome being somewhere between the “V” and the “U”.

What Do Previous Downturns Tell Us And What Are We Facing Into?

The impact of COVID-19 stands out amongst the history of financial market downturns over the last 33 years more for its speed than its scale. Markets have moved very rapidly to price in the undoubted recession resulting from the virus. From a historical viewpoint, it is worth remembering that the average recovery period for investors has been in the region of 15 months based upon previous experience as can be seen from a review of the last thirty or so years.

  Peak   Low   Recovery   Fall Days from Peak to Low Percentage Gain from Low Point Days from Low to Recovery
27/08/1987 04/12/1987 09/01/1989 -23% 99 30% 402
16/07/1990 16/01/1991 01/04/1993 -19% 184 23% 806
27/03/2000 09/10/2002 22/11/2006 -51% 926 104% 1,505
12/10/2007 03/09/2009 22/04/2014 -59% 692 144% 1,692
07/07/2011 04/10/2011 02/01/2013 -21% 89 27% 456
21/05/2015 11/02/2016 10/02/2017 -19% 266 23% 365
26/01/2018 25/12/2018 01/11/2019 -20% 333 25% 311

Source : Bloomberg 19/03/2020

Investor time horizons

Investors typically have a time frame of several years rather than the need to focus on the value of stocks in the next few weeks or even months. With the stockmarket reaction to current events it’s a timely reminder that volatility in markets is not what investors need to be concerned about. Similarly, selling investments because of concerns of daily pricing movements only crystallises permanent losses when a calmer approach means that such losses can be avoided.

We have already exceeded the -20% loss level that characterises a bear market. importantly, what type of bear market might it be? Goldman Sachs has characterised ‘bear markets’ into three types:

Structural Bear Markets

The nastiest of the three types with typically 50%+ losses, these bears start with structural imbalance in the economy and are the deepest and longest lasting. The Global Financial Crisis of 2008 was one such event, as was the Oil crisis of 1973.

Cyclical Bear Markets

Here, it’s usually interest rate increases and falling earnings that are prominent features. This would typically experience 30% downturns with recovery taking a number of years.

Event-driven Bear Markets

In my experience these tend to occur because of an external shock to the system, such as a war or, now, a viral outbreak. For instance, I have seen losses typically at c.30% but the period of losses tends to be shorter (on average 9 months) and the recovery period is typically 15 months. This supports the current situation with the expectation that a vaccine seems to be 9-12 months away. In addition, what’s often overlooked about Covid conditions and Markets in general is that they are co-dependent on each other and not adversely correlated.

Major Global Stock Markets fall

In truth, major events causing Global stock markets to fall are nothing new and are, in fact, part of the norm. Therefore, the greatest risk to anyone investing is not whether they are in the market during such turbulent times but rather they are out of the market for the more frequent advances.

Im summary, for long term investors, bear markets such as the one that we are experiencing now have always presented a buying opportunity in the past and we don’t believe that it will be different this time around.

Our Advice To Investors And Pension Holders

We believe that a buying opportunity will emerge over the coming weeks. So, if you have surplus funds, consider investing some of this money to take advantage of current market instability. But, for everybody else, I repeat my ongoing advice  for our clients:

1. Firstly, if you are invested already, there is little point in selling out now. In other words, Market corrections are nothing new, and you should focus on the fact that in an average bull market cycle of 5 years, you can expect to have 4 good years, and one bad year, it has always been this way.

2. Secondly, continue to make your regular monthly contributions to pensions etc, if at all possible. For instance, I say this because contributions made now are investing at cheaper fund prices than in the recent past.

3. Thirdly, clients who are nearing retirement, but who intend to avail of an Approved Retirement Fund option upon retirement, should remember that your investment horizon is not time limited to the date of your retirement.

Lifespan versus Market exposure

Consequently, it extends to the length of your lifespan and most likely that of your partner also. In which case maintaining equity exposure to achieve real returns above inflation over time is, and continues to be, as important as ever.

In conclusion, Covid conditions and Markets will brighten but a few clouds will pass before this happens.

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