Coronavirus market insight update: 20th March 2020

March 20th, 2020 | News | By Graham Wingar

My general attitude and beliefs surrounding markets and the coronavirus (COVID-19) remain unchanged from our previous newsletter. This however seems a poignant time to pass some extra reassurance to clients and provide further explanation on why my stance remains unchanged.

There have been a few statements from clients and in the media which I believe warrant further explanation and insight.

This is worse than 2008

In much of our risk assessment with clients, the 2008/2009 banking crisis is used as the primary example of the bad periods in investment markets. We use these periods to highlight and ensure clients are aware of the potential drops associated with a large financial crisis. During the banking crisis the IA Mixed Investment 40-85% shares sector (the average performance of the funds in the sector with an equity content of 40-85%), at its lowest point, was down around 25%. It is this figure we show clients as what to expect from a typical medium risk portfolio.

As at the close of the markets yesterday (19th March 2020), the IA Mixed Investment 40-85% shares sector was down around 20%.

The main differences here is that the current drop has occurred over a shorter period. We also do not know if there is still more negative market movement to come (more on that shortly). The drop occurring over a shorter period is a result of the pace of development of information compared to 2008. This drop occurring over a shorter period leads some people to believe that it isn’t done; this is clearly not helped by the more emotional nature of the health implications of the current situation. Just basing this on how long markets declined for in 2008 is irrational.

In the current situation, in a very short period, it has become apparent the levels of disruption that will be caused by the virus and also the level of government intervention. As business disruption is only just starting, the government has already cut the Bank of England base rate to a record low and pledged £350 billion to fight the effect of the virus on business. In 2008 it took far longer for the business disruption to come through and also no one was foreseeing the disruption as easily as the current issues.

It isn’t to say that markets may not have some more negative news before it gets better but what we can look at is the likely business disruption that is to come. The performance of the markets in 2008/2009 were a result of significant downturns in business productivity, leading to job loss, leading to lower spending, which again reduces productivity.

Whether this market downturn will go as far or further than 2008/2009 will depend on the severity or expected severity of job loss and business productivity. With the government being very clear on their stance, stating that they have learned lessons from 2009 and committing significant funds very early on and cutting interest rates, there is a lot of confidence in the government being on top of this business situation over the longer term.

So, with there still being uncertainty and high levels of volatility in the markets, why should you be confident it will recover?

In order to believe the markets will not go back to where they were, you would have to believe that the levels of business output prior to the virus cannot return. Although the health impact and strain on the healthcare system are clearly high, there is little expectation for the virus to cause a significant decrease in population. That statement isn’t meant to be a trivialisation of the number of deaths but highlighting the reality to the death rate and that generally the deaths are likely to occur in the demographic who are less of a contributor to GDP (Gross Domestic Profit is a measure of economic output).

With these facts being established it is hard to see a point where the levels of consumer demand and business productivity do not return. The obvious unknown however, is how long this may take.

It’s trending down

This is something I have had said to me. We have to be very careful with this kind of thinking, just because it has gone down fairly consistently over the past month, does not mean it will continue to do so.

This belief comes from two things: firstly, it is the psychology of fear and recent movements that draws the attention to the direction of travel and a belief that it is like a graphical trend line. There is only one long term trend in markets and that is up, but we must highlight that this is a long term trend and that volatility in the short and medium term can often cause us to question this when emotions are high. That is why we must learn from previous market conditions and economic policies to see and believe the longer term trend. The long term trend upwards is a result of general increasing population, an economic and government certainty of long term inflation and a general trend of increasing consumerism over the long term.

The other issue is that some people are believing markets will continue to fall because the business disruption has not peaked yet. Whilst this is true, markets are not priced on what the current level of business productivity is, but the expected future levels of productivity. They are priced based on all the currently available information and expectations, even those concerns which are yet to play out. This has shown to be true as markets are very volatile to any news at the moment. For example, the FTSE100 made quite a rally this morning based on the further interest rate cut announcement and coronavirus update from Boris Johnson yesterday.

What we don’t know is exactly if the business disruption will be less or more severe than already priced in, this uncertainty will mean high volatility with movements coming based on all new developments until a more clear path and timeline is established.

I can’t afford for it to be worth nothing

Although I have only heard this from one person, it was thought provoking nonetheless. Realistically, a typical diverse investment portfolio could only be valued at zero in a scenario where all property was worth zero, all governments defaulted on all debts and every business stopped all activity, which would mean money would not have any value anyway. Again, with every expectation that consumer levels would return to pre COVID-19 levels at some time in the future, this is something which clearly cannot happen.

Risk to timing markets

My previous post discussed that you cannot consistently time markets. Some people may still feel the urge to withdraw funds whilst the markets are so volatile and look to re-enter when things have settled. The issue is, no one knows when they will settle or which way they will go on any given day. I still stand by this but thought some numbers may give it context. We know markets go up and down but we also know that they generally trend up. Although investors’ psychology in these situations is to avoid the drops, what they often forget is that they risk not having the recovery.

Thanks to Schroders for putting in the leg work on the following analysis. The date range is from 1989 to 2019 – this isn’t trying to avoid the recent drops, it’s just the data which Schroders conducted their research. The aim of this isn’t to try and prove that long term returns are good but only to demonstrate the risk of trying to time markets.

If you invested £1,000 in the FTSE250 (101st to 350th largest companies in the UK) over the 30 years from 1989 to 2019, you would have £26,831. That is an investment timeline of 10,957 days.

If however, during that period you missed out on the 30 best days out of those 10,957 (this is by only being out of the market for 0.27% of the time), your £1,000 would only be worth £7,543.

That is why we concentrate on time in the markets which we have far more control over than timing the markets.

As always we are still here, still working and happy to take any queries you may have.

Graham Wingar CFPTM Chartered MCSI
Investment Adviser/Partner
Future Asset Management LLP
20th March 2020