Coronavirus is the latest threat to market harmony that once again poses a timeless question: how should investors act in a crisis? Whether you’re a fund manager, responsible for billions of pounds of other people’s money, or an individual investor looking out for your own, the question is just as pertinent.
Before answering, there are some more prosaic questions we can consider. I offer some quick-fire responses.
How real is this crisis in an economic sense?
The truth is that we still don’t know the extent of the outbreak or the economic disruption it might cause. We do know that it comes at a time when global growth was already quite anaemic so a downturn is possible. Investors may benefit from holding some recession-friendly assets. Government bonds, the Japanese yen and gold, for example, may offer some insurance.
However, more sanguine economic scenarios may unfold. The policy of containment, which is essential from a health perspective, is what’s currently having the biggest impact in Western economies. Were this to be relaxed, activity may rebound. But to repeat the point, nobody can predict outcomes at this stage.
How will the authorities act?
A robust response from central banks and governments offers a silver lining for asset prices. Interest rates may be further cut; more sweeping tax cuts could also be ordered. If the outbreak is then contained, central banks will have just turbo-charged equity markets. Measuring out the right dose of medicine to tackle economic crises is notoriously hard, as recent history shows.
Is the equity market reaction overdone?
The sharp shares sell-off sparked by the creep of COVID-19 into Europe felt painful. But take a step back. You can see that investors in developed markets, who have enjoyed a tireless bull market for the past decade, have merely had the cream of their returns skimmed off. Share prices only retreated to levels last seen in mid-2019. Look at a 10-year chart for world equity returns and it puts the fall into perspective.
Are markets now cheap?
Valuations, I would suggest, are still not cheap enough to warrant taking more risk, irrespective of coronavirus outcomes. What investors can do with an active approach is to identify potential opportunities and reassess risk bond by bond and stock by stock.
What lessons can we draw from history?
Look at the data and you can draw conclusions every which way, but I highlight one observation on US stock market volatility, as measured by the VIX, also known as the “fear gauge”.
When this index has been high, strong returns have usually followed. On average, the S&P 500 has returned 25% in the 12 months after the VIX exceeded 33. It should therefore be noted that the VIX spiked to nearly 50 in February, up from its normal recent range of 10 to 20.
Historic patterns may not be repeated. They offer some reassurance but it would be unwise, even glib, to dismiss the risks of this crisis until they can be quantified.
It’s also worth acknowledging the importance of up-to-date information. It is always crucial to investment decision-making but is also often in short supply at times of crisis. The work of our analysts in dozens of locations around the world is vital. Our 20-plus team of data scientists, in particular, are at the coal-face of information gathering. The unit is working on a range of coronavirus impact projects. At the basic end, to give one example, this involves tracking high-speed indicators of economic activity such as use of apps for taxis, mapping, takeaways or coffee.
This leaves us with our primary question: how should investors act in a crisis?
The short answer is: calmly and rationally. There is still plenty to do, of course. Our investment desks continue to undertake detailed analysis on thousands of stocks and bonds. From a multi-asset perspective, we are always attuned to further shifts in economic prospects that alter the outlook for the areas in which we invest. Our more specialist investors, meanwhile, will continue to focus on opportunities in their areas, be it real estate, infrastructure or private equity.
Good investment is about cool-headed decision-making. The source of uncertainty will always be different but well-established investment processes are designed to cope with this. They enable active fund managers to step back and assess – and dispassionately search for opportunities regardless of the conditions.
Good investment also involves deciding on a long-term strategy and sticking with it.
So for our daily routine, the only actual thing that changes is the amount of hand-washing. All is business as usual.