A Message From KDW Director, Marcus Maisey
Published by Sophie Fillmore on 2020 03 30
A Message from KDW Director Marcus Maisey
As you are aware, worldwide markets are experiencing extreme volatility, and market swings of 5% or more in a day are not uncommon. The reason for this volatility is uncertainty over the Coronavirus’ impact on established economies. The problem with a pandemic - as opposed to a pure economic downturn - is the difficulty in assessing its duration and a likely resolution to the situation. As the Chinese, European and American economies are shut down one by one to reduce the spread and human cost of the pandemic, the markets have reacted with fear that this will drive the world into recession. Only time will tell whether the global containment effort will be successful and what the long-term effect will be.
Pandemics by their very nature eventually recede and there are already signs that the COVID 19 infection rate in China is receding and that Italy has peaked, however there is considerable uncertainty about this. Markets remain nervous. However, investment markets would appear to have stopped the dramatic falls after the initial shock and impact of the virus. Recent weeks have seen markets trading sideways, including a dramatic increase of near 10% in a day. This doesn’t mean we are out of the woods but provides some respite for now.
The markets will look for a resolution to this crisis before confidence returns. It is widely anticipated that this will come when we have a combination of factors. National Governments and Central Banks need to back their economies. To be fair to them, they have stepped up to the proverbial plate with the UK supporting business and employees with “whatever it takes”; Germany has pumped billions of Euros into its economy and the US has agreed an unprecedented $2 Trillion injection of cash. Quantitative easing is back – just when we thought it was consigned to only being mentioned in future economic exam questions. What the markets are looking for now is some medical/scientific step forward, whether that be a definitive test and ultimately a vaccine which will surely come at some point. Until then, markets will remain nervous. The world has changed in the last 4 weeks.
Turning to Your Options
There are effectively four options if you are currently invested.
Switch to cash
If you switch to cash, you may deem that you are taking the safe option. For sure cash won’t fall any further however by switching to cash you are crystallising the losses that all portfolios and asset classes have suffered over the last four weeks. Many people believe that they can switch back in before the markets rise, however it is notoriously difficult to do and if you are out of the market for only a day or two you could miss out on a sharp rise such as that of the 24/25 March.
Switch down a risk profile
Let’s assume that you hold a balanced risk profile. An option would be to switch down a risk profile to a more cautious risk profile. This may give you some comfort as the volatility of the fund falls, the lower the risk profile. This is mainly achieved by the fund holding a lower exposure to stock markets. This option has historically been better than a switch to cash as the old adage of “Time in the Market, not Timing the Market” has held true over the years. If you switch down a risk profile you will retain some exposure to real assets and participate in the eventual upswing in the market albeit at a slower rate than the fall as you will hold a lower exposure to stock markets which tends to drive the growth over the longer term.
Hold your current risk profile
The conventional wisdom is to hold your nerve in a downswing and wait for the markets to recover. Markets tend to be inefficient in a crisis as uncertainty leads to large sell offs which in turn trigger computer generated algorithms to further sell down stock, perpetuating markets falls and lead to markets becoming oversold in the short term. Most world markets had been steadily rising through 2019 and the first two months of 2020 only for the impact of Coronavirus to shock the markets. We would recommend that if you were in for the downturn, then you should wait for the markets to recover. The consensus view from fund managers appears to be that we will witness a U shaped recovery rather than a dramatic V shaped bounce. If you look at the long-term nature of investing the short-term losses experienced in the last month should eventually be recouped – although the time period for this is not clear.
Switch up to a growth profile
The last option is to switch up a profile and buy into the markets at a time when they are at historic lows. This option is not for the faint-hearted, as there is sure to be more volatility in the next few months as the Coronavirus sweeps across the UK and the US, no doubt leaving collateral damage to some businesses and sadly taking human lives. However, markets are very cheap on an historic valuation as the economic impact on certain sectors such as travel and airlines have had a devastating impact on their business models. If you increase your exposure to the stock markets and take a 5-year view, I suspect that today’s prices will prove attractive. This, however, is not a recommendation to immediately switch to a higher risk, and should not be construed as such.
Currently holding cash
Several clients are holding cash, and I have had discussions about if and when they should invest. As discussed above, the current market lows will probably prove to be an excellent buying opportunity when viewed in hindsight, but it is a bold move to fully invest from cash into investment funds at this time. Some with an appetite for risk have already done this, however for many it is too bold a move. For these clients, we have been investing into an investment platform and then phasing the investment in from cash over 6 or 12 months. The advantage of this is that the money is invested over time and if the market falls the in the short term, your capital will actually buy at a cheaper price when the particular tranche is invested. This spreads the risk of investing at a single point in time.
We live in strange times and very few of us will have experienced anything as dramatic as the last four weeks, and possibly the next four to six weeks to come. The most important thing is that we all stay safe and come through this crisis on the other side. I suspect that the world that emerges will be a very different place. The Advisers at KDW are here to help and discuss any particular concerns that you may have and provide advice through this difficult time. Although the office has been closed, we can be reached on the normal office number or directly on mobiles.
Finally, please all be careful and stay safe over the coming weeks.
The commentary and options in this article are not designed as a recommendation and should not be construed as such. Please remember that past performance is not a guide to future performance. If you would like individual advice, please contact us to discuss your particular situation.Back