The coronavirus markets correction reminds many investors of the Great Financial Crisis of 2008, but it is very different in the real world. At least in 2008 you could continue to travel, your children went normally to school or college and you could socialise with friends and family. It’s unreal to walk down Grafton Street at the moment and see practically every shop closed.
In 2008, our investment team had time to react to the financial crisis and to act rationally to protect our clients. We sold all of our US financials in the summer of 2007 near their highs as the subprime crisis started, and sold our Irish bank holdings in the spring of 2008 after Bear Stearns went under when, while they were down some 30% to 40% from their 2007 peaks, they still had double digit prices, and it was still a few months away from the Lehman Brothers collapse. This time, the markets have fallen around 30% in a matter of a few weeks.
The speed of the decline plus the spread of anxiety to other asset classes – corporate bonds, non-German Euro sovereign bonds, property, even that usually-reliable safe haven Gold – plus a disappearance of liquidity (Irish large cap CRH dropped about 15% one day mid-March because there were a couple of sellers and no buyers), means that most investors have suffered portfolio losses in February and March 2020.
In the equity portfolios we manage – we did not foresee how the coronavirus would spread so quickly into a global crisis in just 3 weeks. While holdings we thought would hold up well, such as Proctor & Gamble (nappies, toilet rolls), Reckitt Benckiser (Dettol, antiseptic wipes), pharmaceuticals and technology giants (benefitting from more online/remote/cloud/cybersecurity/social media use) have all fallen significantly.
There is mass panic in all aspects of life because of the virus, including stock markets. We have adjusted our portfolios to both trying to limit further downside as much as possible and also to give our portfolios good potential for recovery.
Many clients are asking us when we think we might get a market bottom and begin to see prices trending upwards again. We believe using financial analysis, such as price earnings ratios, trying to guess the extent of the coming recession in Q2, trying to guess how much company earnings might fall (or benefit) because of the crisis, is not of much assistance in the short-term as everyone focusses on new Covid-19 cases and deaths, lockdowns, social distancing and their family’s health.
We may have seen the bottom for equity markets already in late March, but perhaps we may get excellent investment opportunities in the coming weeks if markets get a bit nervous about how the lockdown easing in Europe plays out and to what extent we can avoid a second wave of the COVID-19.
We are maintaining above average liquidity levels and are focusing our research on companies that should do well from the changing spending patterns due to the virus, along with companies where businesses should rebound sharply when the world starts to go back to normal. One of the benefits of our small and well-experienced team is that we are in a position to act quickly and decisively if we feel a market bottoming out process is happening, and will have our ‘shopping list’ of suitable stocks ready.
We’re seeing huge intervention in bond and money markets by the global monetary authorities to stabilise the financial system, and that has to be sensible to prevent a run on financial institutions and panic about the safety of deposits. To stabilise global equity markets, we may need something similar, for example the buying of equities by the monetary authorities.
History shows us that eventually, and often more quickly than one might think, the stock markets recover.
Goldman Sachs has analysed 27 (US) bear markets since 1800, where the average decline is 38% and on average it has taken sixty months to return to their previous peak. The bank has also separated these bear markets into three categories: ‘structural’ which are driven by recessions or bubbles unwinding, ‘cyclical’ where rising interest rates dampen economic activity and depress company profits, and ‘event-driven’ which are caused by some kind of once-off shock, such as Black Monday in October 1987 or spiking oil prices in 1973/74.
The Goldman Sachs view is that we may be in the midst of an event-driven correction. Such bear markets have more modest declines, have much shorter duration and last just fifteen months.
Let us finish on a further optimistic note. Looking back at the US stock market between 1935 and 1950, taking in World War 2 and the years immediately before and after, believe it or not, the equity market bottomed in May 1942. That was some three years before the end of WW2, as military fortunes for the US started to improve in the Pacific, right in the midst of the gloom and maximum bearishness, and further aided a few months later by German military losses at Stalingrad.
So we should not be surprised if, when we look back in a few years’ time, that the bottom of the coronavirus ‘crash’ was at the time of maximum new cases and widespread lockdowns across the world.
Pramit Ghose is Global Strategist with Cantor Fitzgerald Ireland.
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Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.