This Great Virus Crisis (or GVC) brings huge upheaval and uncertainty about our physical and financial future. In hindsight it should prove short term but COVID-19 will now probably always be with us, needing regular vaccination… like the flu. Until vaccination is possible, we need separation and regular hand washing. Soap breaks down the virus’ fatty outer membrane to kill it in 20 seconds, so stay soaped-up until it does.
Health care professionals are caring like never before, bravely serving our health interests while risking their own – for which we are truly grateful. It may need prolonged effort if wider community infection transmission has gone undetected while testing was constrained. New tests give results in minutes rather than days. If we’re all conscientious, two months or so of severe lock down might then morph into a very gradual lifting of restrictions towards economic recovery. We’ll still need to test widely for asymptomatic cases and up to four weeks’ social distancing once people recover.
A COVID-19 vaccine or anti-viral treatment may arise within 12-18 months, then we may return to normal. While we wait, the World Health Organization is trialling four different drug treatments for COVID-19 and this can’t be rushed both for efficacy and also because its scale of production and use will be huge.
Meanwhile, money decisions are best made on things we can be reasonably confident about. We’ll financially guide you through these crucial months, beyond which full recovery depends on the damage inflicted but market prices usually anticipate actual recovery by 3 to 6 months.
Has it peaked and how do we recover?
Australia may have reached peak infection but our lockdown will extend beyond. China seems to have already peaked with its WeBank Economic Recovery Index already back to two-thirds of last year. Despite many behavioural changes, they may ultimately be one of the least virus-affected countries.
Australia’s period of complete lockdown then some gradually easier months might get us back towards a new normal focused on jobs. If so, it would be the fastest bull-bear-bull recovery after the heaviest stimulus package in history. If instead it drags out, a lockdown may be hard to sustain, so balancing health against economic costs may cause a loosening for all but older/vulnerable parts of society until vaccination arrives. The over 60s seem 20 times more likely to die from COVID-19.
In the balance between health, economy and the tolerance of citizens, what will a partial normalisation after this lockdown look like? It depends on asymptomatic infections and fatalities but we can expect sustained partial restrictions, maybe in ‘restrict and release’ cycles.
Some activities will take longer than others to return to normal. National borders are likely to stay closed for quite a while – for travel you’ll probably need to certify you’re immune or of minimal COVID risk. New tests will eventually detect the presence of antibodies, telling us who’s already had COVID-19 for deciding about lifting social distancing measures.
Lessons from previous bear markets
Each bear market always feels like the worst ever but this one brought a new element business couldn’t anticipate – demand destruction driven by the need for social distance. Energy markets had three compound shocks: 1. demand (people staying home), 2. supply (Russia/ Saudi price drop) and 3. the GVC capital shock.
This is an unprecedented event with no reference point in living history. Though we can’t rely on an analysis of previous bear markets for a template on this one, we can use history as a guide for the phases in which the market may move, as follows:
Initial shock and indiscriminate sell down
It was a very high speed of sell off, overshooting due to forced selling from those using debt (most of whom will now stay out of the market until volatility fades). We saw good and bad investments alike sold down. This included traditionally defensive holdings like gold and bonds.
While markets have recovered slightly after this, considerable uncertainty still lies ahead and real economic recovery will only start when a COVID-19 vaccination or anti-viral arrives.
More rational adjustments in markets, amid bouts of volatility
We’d expect good quality companies to begin to be supported earlier while the poorer quality companies, or those with lingering issues beyond COVID-19, to be held down longer. We’d expect the cyclically impaired companies (i.e. those that suffer more in a recession – energy stocks, financials, consumer discretionary, and some industrials) to be volatile as the economic data begins to flow. Nonetheless, this would cause the more robust cyclicals to provide great value for long-term investors.
The reality of the economic impact
The possibilities range from a “V” shaped recovery (now unlikely) all the way to a depression (also unlikely). This will further reveal those companies that have weak balance sheets and challenged business models. There will be companies forced to raise capital, i.e. share purchase plans and entitlement offers – especially those companies with lots of debt.
While we expect the economic news to be horrifying, share markets tend to look forward. Historically it’s amid peak fear and panic that the market begins to move upwards. You might also expect at this point there is some rotation from the ‘expensive defensives’ into the robust cyclical stocks trading at extreme lows.
Gradual economic recovery
There will eventually be a gradual economic recovery. Governments and Central banks have thrown the kitchen sink at it… unlimited spending and money printing to alleviate shutdowns triggered by our health strategy. How will they pay for this? We’ll all bear the cost and there’s a clue how after WW2 – raise money with plentiful bonds, then limit the bond rate while inflation rises to reduce the debt value.
Given the nature of this event, it’s likely we’ll also see long-lasting changes in the way consumers behave and the way we all work and engage with one another. Perhaps technology plays an even bigger role then and office space is reconsidered.
Shares are cheap
Given the unique nature of this bear market, it’s difficult to know where we are in the various stages outlined above. It’s best not to guess, but rather focus on long-term value as we have always done.
The US stock market is over half the global market and was extremely overvalued when the pandemic struck but is now back to fair value. Our own, and other global markets, were fairly priced but are now cheap. No-one knows when markets will bottom but most share valuations are at 20 year lows and with interest rates near zero, cash is temporary and bonds aren’t safe unless held to maturity.
Meanwhile, shares offer excellent long term value and surplus cash offers a once in a decade opportunity to build or slightly re-position for a robust, lifetime portfolio if you’re prepared to weather the volatility.
In the seven bear markets over the last 60 years, loss recovery averaged 4½ years and in twelve US bear markets over the last 55 years, recovery averaged 1¾ years. Once a bear market ends, returns are about double the norm as patience is eventually rewarded to historically outperform speculators who dart in and out of the market.
Investors who wait for the economy to bottom out before buying again will likely miss the turn in the market. Using the GFC as an example, even if you had known for certain that October 2009 would mark the peak of US unemployment and had waited until that turn in the economy to invest (or sell the short positions), you would have missed a 64% rally from the March lows. Markets look forwards, not backwards. So, it’s unwise to await 100% certainty, as markets take off well before then.
In all this, it’s important to invest selectively… because although most asset prices fall in a bear market, they don’t all rise equally later. We’ve been focused on market leading businesses with manageable debt, loyal customers and robust management operations. So while others may panic, let’s just slightly re-position with investments likely to recover well.
Cash and Diversification
While ensuring reliable income to meet your needs, keep enough portfolio insulation so you can avoid distressed selling. Here your diverse asset mix helps, as your adviser works with you to navigate a safe path for adequate income and a better ultimate recovery.
Though only measured later, we usually add strong value in bear markets as it’s a time when foundations for wealth are often laid. There’s much we can’t control in global investment markets but we can control some important things, including:
- Understanding what you want to achieve with your money… and based on this;
- Agree on your Strategic Asset Allocation target, enabling us to manage portfolio risk to suit your agreed objectives;
- Then together we select and invest in high quality investments, so…
- You’re well diversified across a range of individual listed and unlisted assets;
Consequently, your portfolio is structured to withstand market volatility and will have coped comparatively well. While we can’t predict how long negative markets will last, such global events can come anytime so we’re always prepared.
If you would like to discuss your investment options with one of our wealth management professionals, get in touch with Wotherspoon Wealth today!
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.