| It has been a turbulent couple of months for many people, with a sequential case of ‘F’ events happening. We have had the calamities of the Fires, the Floods, and now the Flu situations! Yet, despite these local and global destructive events, the markets did not shy away, and indeed had gained, generating strong returns really for the past year up to last week. Then, last week, a fourth ‘F’ emerged with a definite adverse impact, that being ‘Fright’! |
I think it is fair to say that the past week has been a very testing one for all including for investors. This northern winter infectious virus, given the name coronavirus (COVID-19), has been known about for at least the past two months, and had initially been regarded as just another virus, and which had its origin from mainland China. Yet, this particular virus had this air of uncertainty about its actual source, with it thought from the ingestion of bats by some Wuhan residents’ firstly, and then this rectified to being sourced from the eating of the Pangolin mammal, a supposed delicacy. This small mammal is sadly on the endangered species because of it being hunted for meat! Anyway, it has been tracked as the coronavirus carrier and the eating of its meat is where this all began.
Slowly, over recent weeks’, more cases of coronavirus were heard of as more people in China were diagnosed with the virus, and then in other parts of Asia. There was one case on a cruise ship in Japan which was then quarantined by authorities with all on board – so, with nowhere else to go, over a 100+ people became infected (not a very smart move but always is easy to know in hindsight).
When it emerged last week that other countries, particularly in Europe and the Middle East, had identified people with the virus, it has now become a far more serious concern. There were more cases of the coronavirus than thought and, worse, is that it was spread in more countries than figured. Then, we had the World Health Organisation coming out and stating this virus and its spread is a ‘high level’ concern that could be upgraded to pandemic status (we all hit our Google search buttons to see what exactly is a pandemic and versus say an epidemic!).
The small problem of a flu-like virus is now seemingly becoming exponential. The genie is out of the bottle so to speak. The impact of this virus is bigger than thought.
And so, before you know it, as was evidenced in the past week or so, the media is on to it creating a frenzy, everyone is concerned and many panicking (and face masks are sold out!). People suddenly feel vulnerable and the markets turned viciously last week.
Medical experts are working through with a vaccine solution and economists are modelling and predicting away the scenarios ahead. Governments around the globe are now jumping with vigour to contain the spread of the virus and its concerning impact on economies. It all came to a head: uncertainty, fear and ultimately the stoking of panic has resulted, hence, what we saw in the markets last week.
The hedge funds smell blood, the aggressive traders start shorting the markets mainly through selling futures and other derivatives, algorithmic trading systems go into their programmed action, and the selling cascade goes into force. This force can be quite sizable and brutal when it hits, especially with the accentuation of fear and panic prevailing! Panic brings more panic and the chaos compounds.
And seeing all this, one of the immediate reactions that investors think of (and alas, some act on) is to jump into the ‘liquidity trap’. Because this all is painful to watch and listen to – everywhere you turn on the 24-hour media machine – as is talks only about doom and gloom surrounding the events in motion. It is the only focus in town! Selling creates bad news which the media sells! The liquidity trap, the phrase I think Warren Buffet coined, refers to selling what is liquid in times of volatility, and the equity markets are extremely liquid. Portfolios of shares can be turned into cash quickly by hitting the sell trigger but, sadly, are often done at targets where, because of the panic, low and poor value prices just so the seller can say ‘get me out, broker’!
Pull the trigger first, hit sell and then, sadly, once things settle down, as they do, the seller contemplates that they probably should not have sold good quality investments in a rush of panic and have done so at poor prices. I will cover more on this important point further on. In saying that, I think we all do need to stop, think, better understand, and put this whole situation into some perspective and sensible timeline. And stay calm!
As Coolabah Capital Investments described in their succinct research paper on Friday about the coronavirus situation after the heavy week of selling which was had; “The inherently unknowable nature of the coronavirus is creating widespread market failure…..flowing from extreme information asymmetries”.
The impact of the coronavirus to people is serious but is manageable, meaning very few people by percentage will actually die from the virus. However, the greater concern appears to be, and is, what will be the resultant reduced global economic trade and business activity, etc.
The main strategy now by authorities around the globe is for the containment of the virus. This is the primary challenge, and at least active endeavours are underway for this containment. However, and what is really behind the fears of the coronavirus causing a global economic slowdown, are the drastic measures used for the containment of the virus itself spreading!
A Catch 22 predicament really. The dramatic images of lockdowns highlighted by the media is fuelling ‘the’ panic! As the Coolabah article correctly notes, “..is that the problem with the policy of containment, which is currently the only viable option, it effectively throws the economic baby out with the bathwater, (potentially) crushing economic growth in the interim”.
Beyond the token trademark image of millions of facemasks that people in Asia, and now Europe, are wearing in the hope of not contracting the virus, we are now seeing the signs of serious government containment measures abound in different countries: some airports and sea ports closed; travel bans in and out of China and other countries now being enforced; group events being cancelled; people being restricted to only their homes (conjures the bleak image of the Great Plague of London in 1665 and the containment policy of locking the ill people in their homes and planking up the doors!).
The containment process all means less trade, less travel/tourism, and less business activity, all resulting in less spending and reduced economic activity. It spells of an economic slowdown no doubt….but really for how long must be properly considered in reality!
I think it is very important for investors to remember, that this containment approach is not a permanent feature, it is preventative measures for longer term success against the virus. These measures will be lifted once the coronavirus situation abates. We just do not know when. In the meantime, life goes on, as it always does when these ‘black swan’ like events arise in our lives!
There are three powerful mitigants to all this bad and topical news according to the Coolabah research which I will now quote here. “First, a vaccine will be developed in the next 12 months (and human trials have already begun). Second, there is likely to be an effective anti-viral drug available within six months (trials well underway)
…..And, finally there is evidence that the virus struggles to spread in warmer climates (the southern hemisphere at present) so that, as with the flu, COVID-19 will fade during the northern hemisphere’s summer season”. Makes sense; and as an older client of mine with a medical background said to me on Friday, that drinking warm water and hot drinks will thwart the coronavirus! The virus hates such warmth! And today is the first day of spring!
I would add another vital positive factor. I do believe that there is and will be a solidarity amongst all countries in their efforts at combating this virus and to remedy the economic fallout as speedily and cooperatively as possible. Australia, with its strong medical and health system, and its apparent state of preparedness, itself appears to be ready for the likely challenge ahead of dealing with any virus cases and a possible increase of these. Yes we are an island continent, but we are not immune to world economic events and consequences.
Events such as we are experiencing now highlight how inter-dependent the world really has become. On the economic front, Coolabah research adds: “From a policy perspective, (we should see global central banks and treasuries) have rate cuts to support growth coupled with more extensive liquidity and asset purchase operations i.e. quantitative easing or QE…to help bridge extreme information uncertainties until a vaccine is available.”
When specifically examining Australia’s situation, the article states that, “This will necessitate the Australian government to set aside (postpone) its 2020 surplus target (by having increased government spending on the likes of infrastructure) and with the RBA supporting the ensuing fiscal stimulus with rate cuts and perhaps its own government-bond focussed QE to put downward pressure on the Aussie dollar, which will assist externally-facing industries”. I would add as well as also assisting our important economic areas of tourism and foreign student education.
Ahead (Important Investment Perspectives)
I have been asked by several clients in the last couple of days about the events in play, and what are my thoughts on this? There are no guarantees we know, but I outline my key thoughts below. In the end, a person makes the final decision regarding their investments. Are we likely to see continued market volatility in the coming weeks’ and even months’? I think that is a yes, as well as the likelihood of some more market retracement in price terms. We must also remember that although we have seen around a near 10% correction in the market in just a week, it must be put in the context of having seen strong gains of 20%+ over the past 12 months! This must be put in perspective in market cycles. Market corrections are a natural part of market cycles, particularly after strong market rallies!
So, what should a true investor do amidst this more peculiar and testing time we are experiencing now? Well, really try and ignore the noise, the hype and the media negativity, much of which is based on fear mongering and not on the facts or on your personal investment objectives. Media has a lot to answer for regarding the inaccuracy and one-sided approach to what they transmit in such times. They want drama, they want panic, irrespective of its consequences on people and their reactions to what is ‘written’.
Ride out the storm as you normally would and should. If you do not have to sell, and you are an investor, why sell? Control what you can control. Do not become part of the panic.
Your investment portfolios are typically set up and designed for growth over the long-term, and most particularly, for the generation of income streams to fund your non-working years. They are in a researched quality investment mix designed aimed for the investor’s needs and wants. Yes, prices do move, and volatility will rear its head on occasion, as it is doing so now, but selling a good asset mix in volatile times is not a sensible long-term investment strategy.
There is the thought (or is it of comfort!) of course, that if I sell now – in the middle of the panic – then I can simply buy back in at much cheaper prices. On paper that strategy works but in reality, what if this does not happen or you are spooked into getting back into the market, or the pull-back you expect or you are told will happen just does not (the markets can move very quickly as we know). This leads to a jump in and jump out approach. You adopt a trading mentality. This is not what investing is about. Do you sell your home or investment properties when a bout of volatility hits? I would doubt so.
On the opposite tack, weakness in markets brings about cheaper buying opportunities for adding quality investment assets to your portfolio!
As I always have said, investing can sometimes be a tough gig as we have known on occasions of high market volatility in the past (e.g. recent events such as Brexit; the nuclear stoush between North Korea and the US; the China/US trade war), and we too know at this very moment but, I do believe, it does get easier with time, understanding, experience and patience, and it does deliver results. We must also remember importantly beyond the moment in play just why we are investing. Keep the outside noise at bay!
I certainly concur with Coolabah research’s conclusion as to what is happening right now, where they say “When all is said and done. The current fear and anxiety will translate into a tremendous buying opportunity because COVID-19 virus has no real ramifications in the long-run. That time has, however, yet to arrive”.
When will it be time to buy, there will be no bell to signal this is the time! A sensible approach for real buyers in these times, I think, would be to select what investments assets they want to add to or buy, and scale in this buying on these market pullbacks.
This is a difficult and uncertain time for all. There are no guarantees things will or will not happen. We all wish we could know the future. However, remain resolute and, as history has often shown, the best times to buy is when things look the worst! This is how I am personally approaching this somewhat turbulent time.
A belief in the benefits of long run investing and the building of quality investment assets.
Keep the faith! Yes, another ‘F’ but one we all need in life when bad news encroaches us!
As always, should you have any queries, please do not hesitate to contact us.