The impact of the COVID-19 pandemicMar 18th, 2020
It is clear that we are living through an unprecedented event. That said, history shows that many of the biggest stock-market shocks are caused by things that we did not see coming.
Clearly, given the nature of this event, the primary aim is to keep healthy and follow all medical advice.
Financially, the robust financial planning already implemented will help protect, because:
- Many have periodical payments;
- The available cash fund will allow you to meet needs for sufficient time to ‘ride out the storm’; and
- Even if that fund runs short because of a very long period of impact, the ability to rely on defensive and cautious funds, that have not moved as dramatically as markets, allowing longer-term assets to recover with time and greater certainty.
Market downturns tend to be caused by three types of situations:
- Cyclical; and
This situation sits firmly in the ‘event’ category, and historical data indicates that markets tend to rebound faster after such event-driven episodes. That said, this is clearly an unparalleled event risk, and the impact is likely to be more severe than first anticipated; particularly with the extreme measures being taken by developed markets, which seem only likely to increase.
It is also too early to see any real impact on the economic data that markets usually react to. As a result, markets have to react to the little information available that is changing regularly. This is why we have seen so much volatility in markets over the past days.
It is very important to note that central banks and governments are reacting decisively, which is likely to mean that, once there is a change in sentiment, conditions should be much stronger given the large level of liquidity injected into the economy.
That said, it is also too early to know if this event will lead to structural and/or cyclical change.
For example, it is clear that we are all having to communicate in different ways (via FaceTime or Zoom), with working from home becoming the norm for workers. If this were to be for a prolonged period of time, it might be decided that this is the ‘new norm’ that will have a lasting change on behaviour, business and profitability.
This might particularly be the case if the medical advice indicates that such viruses are likely to become more regular events.
Therefore, it might take longer for ‘normality’ to return to everyday life and markets.
That said, as event-based market corrections have, historically, been short in duration, markets could also recover quite quickly.
The catalysts for positive change in market direction include:
- Valuations – the market becomes too cheap for investors to ignore;
- Containment - a slowdown in the spread of the Coronavirus in developed markets (although this is not expected in the next few weeks);
- Vaccine, treatment or cure - there are a number of companies starting human trials in the next few weeks; and/or
- Monetary/fiscal - we are seeing governments and central banks responding.
We will continue to monitor markets and the investment funds, as well as speaking regularly with the investment managers, in order that we can suitably react to this changing set of circumstances.
However, it is important to remember that the effective planning already in place will provide the protection needed to ride out this storm. We didn’t just explain in detail the down-side risk of investment and that values can go down as well as up, we planned for it.
In the words of Mr Warren Buffet:
Predicting rain doesn't count, building the ark does.