While there are clear consequences in terms of market performance and it is not possible to predict the extent of the fallout –we continue to position client investments to meet their long-term return objectives taking all factors into consideration.
In 2019, global stock markets produced remarkable returns, with the MSCI AC World Index – a broad measure of global stock market performance, rallying 27%*. Locally, the All Share Index (ALSI) also performed well, increasing 15%, although this was due to strong performances by gold and platinum shares. Entering the new year, we believed global markets appeared somewhat overextended and that 2020 was likely to be a year of consolidation. However, we didn’t foresee a major correction.
The coronavirus has fuelled alarm in global markets. Panic-selling has been triggered by fears that the spread of the coronavirus will tip the global economy into a recession, leading anxious economists to downgrade their forecasts of global growth, and companies guiding earnings expectations lower.
The scale and the speed of the fall in global markets has caught many off guard. Nothing of this magnitude has been experienced since the bleak days of the 2008/9 global financial crisis. On Wall Street, the S&P 500 has plunged 11% from its all-time peak recorded less than three weeks ago. Similar slides have been suffered on all global exchanges.
Domestically, the ALSI performed even worse, declining 13% in February. At the close of trade on 28 February, 70 stocks had registered new 52-day lows. The coronavirus outbreak and resulting sell off in global markets comes at a time when the SA economy continues to grapple with its persistent structural impediments. The country’s fourth quarter GDP declined by 1.4% last year. This was the third contraction in the past four quarters and signalled that South Africa slipped into a technical recession.
Pressure is building for global authorities to take preemptive steps to limit a major economic fallout, although few experts believe the chances of a disastrous nosedive in business activity are that high. Finance ministers, central bank governors, the IMF and the World Bank have agreed to do whatever is needed to guard against economic risks from the spreading of the virus. In the US, the Federal Reserve held an emergency meeting this week where it resolved to cut the federal funds rate by 50bps.
It’s far too early to gauge what happens next. No one really knows. But what we do know is that people feel the pain of loss far more acutely than the pleasure of profits. It torments them to hold back on spending and investing. There is certainly a level of panic reflected in market movements as the stress of seeing wealth shrink drives investors to discount the worst economic outcome possible. History also shows us that people and markets are resilient and bounce back fast. In the past five years, US markets have fallen more than 10% on five different occasions, yet the S&P 500 index is still up 40% in that time.
From an investment point of view, the coronavirus outbreak isn’t changing our investment process. While there are clear consequences in terms of market performance and it is not possible to predict the extent or length of the fallout – we continue to position client investments to meet their long-term return objectives taking all factors into consideration, including core fundamentals, liquidity responses by central banks and avoiding speculative action based on the unknown.
However, we will monitor the situation closely and respond appropriately should it be required.
Chaos is uncomfortable and when something is uncomfortable, we tend to want to get through it quickly. However, no-one can envisage the path investment markets will take and uncertainty will remain, in response to this challenging environment. Whilst we anticipate further market volatility, we continue to remain vigilant as this does not suggest that there aren’t pockets of opportunity.
Above all we would like to assure our clients that Sasfin remains committed to positioning your portfolios in order to meet your long-term objectives in the current and expected lower real-return environment.
Last week, we sent out communication regarding the Coronavirus and the adverse impact it had on financial markets. A week later and markets have not had any respite as they continue to be battered, compounded by further global events such as the developing oil crisis following the collapse of OPEC negotiations. These events have resulted in unprecedented market movements. However, the oil price drop should help an ailing South African economy and alleviate some stress on over-burdened consumers.
Markets tend to be forward-looking with one of the biggest factors fueling this market shock been the uncertainty of outcomes as further Coronavirus cases outside China increase and no vaccine is discovered. This is having a marked impact on investor-confidence. The most startling characteristic of Coronavirus is the pace of its impact on the financial markets where it has had a shock-effect. At this stage, the expectation is that the Coronavirus will not have a structural impact on financial markets over the longer-term, unlike the financial crises in 2008.
In the short-to-medium term however economies, corporate profit and growth worldwide will be subdued as investors, businesses and consumers take precautionary steps and try to make sense of the current events. Primary and secondary effects as well as supply-chain challenges have already been felt.
Central banks and governments around the world have tried to calm markets with a variety of packages aimed at providing stimulus.
One could ask what has changed on a fundamental valuation basis? Global markets had already been in an extended bull run with inflated valuations underpinned by “easy money” (low interest rates, quantitative easing etc.) Locally, South Africa’s continued poor economic performance over multiple years has already had a negative impact on the earnings of domestic companies. The local currency, like other emerging market currencies, has been affected by a “risk-off” attitude as foreign investors look for safer havens in developed markets.
How should investors respond, if at all? Unfortunately, they appear to have responded with panic. The negative emotional impact of losing money far surpasses the positive emotional impact of making money and in this uncertainty, emotions are running high. It is quite possible that we are in for a protracted period of volatility, but no one really knows. The first line of defense should be to stick to the basics of staying invested and remaining diversified. It has been empirically shown that trying to ‘time the market’ to improve returns adds another layer of risk, which often does not work out well.
Panic, hasty decisions or trying to chase higher returns blindly, often results in investors taking on additional risk without fully considering the possible unintended consequences, which can have a longterm impact on investment returns.
Chaos is uncomfortable and when something is uncomfortable, we tend to want to get through it quickly. However, no-one can envisage the path investment markets will take and uncertainty will remain, in response to this challenging environment. Whilst we anticipate further market volatility, we continue to remain vigilant as this does not suggest that there aren’t pockets of opportunity.
Above all we would like to assure our clients that Sasfin remains committed to positioning your portfolios in order to meet your long-term objectives in the current and expected lower real-return environment.
