Sit Tight or Flight?

If a week is a long time in politics then the last fortnight feels like an eternity in portfolio management. It has been the most drastic sell-off I have witnessed in 30 years of managing money. While every crash is different by way of origin and outcome the speed and scale of this one has little precedent. It is worth remembering that the 1987 crash which occurred in a single day is now just a blip on the charts, although it was a major shock at the time.

As March began there were few indications that such a rapid decline was in the pipeline, given that the situation in China was already well known. While the Chinese stock market initially dived it then bounced back once investors had correctly predicted that infection rates had peaked. Although China’s recovery in February is a useful guide, it is likely that western markets will stutter further before they can stage any similar relief rally.

We are trying to find a base and for now a tug of war is underway between those with differing views.   Even so-called safe-haven assets like government bonds have recently fallen in value with the realisation that national debt levels are about to surge. Gold also came off its highs as investors sold the good to patch holes left by the bad. While the FTSE-100 index has fallen by 33% in 2020 it is some comfort that client portfolios have been cushioned to a degree, but we appreciate that a loss is a loss.

Having seen interest rates slashed across the world last week we remain hopeful that a turnaround situation is close. Governments have already taken some unprecedented steps to support the economy and are looking to go further with tax breaks and direct support for distressed industries to prevent a systemic crisis. The ironies of private sector bail-outs are best left to academics and historians when the dust settles but there will be unintended consequences.

While media outlets have revelled in spreading fear, very few – if any – have explained how viruses come and go as they have in Wuhan; the ground zero of the pandemic. As any epidemiologist can confirm, there is a pattern to viral growth and decay called Farr’s Law, named after William Farr, who studied the cholera outbreaks in Victorian London. Viral infections spread rapidly, peak and then plunge, in what is known as a bell-shaped curve. There has been plenty of focus on the upward slope but little on the following fall. Human beings are hard-wired to extrapolate trends as though they will continue forever. Like many natural cycles, there is an ebb and flow and as seen in China, the infection rate has slowed dramatically. It now appears that Italy’s contagion has likewise peaked.

Saving lives is everybody’s priority at the moment so it may seem frivolous to discuss financial matters at such a time but history shows that markets rebound strongly after epidemics. Without doubt there will be a big chunk taken out of economies in 2020 and while the stock market sell-off has been a shock and indicates a dislocation in the coming months, it is by no means a permanent feature. Threats and opportunities are the yin and yang of investment so we should look beyond fear and learn lessons.

Our advice for now is to sit tight. Whilst we appreciate how unsettling these current times are including the sharp falls in investment values, decisions made to take flight on the back of headline news are invariably incorrect. No doubt we will adapt, as humans have done to all kinds of shocks down the ages. Such episodes have also been a catalyst for significant reform so we believe there could be unexpected positive outcomes.

If you have any questions or concerns then please contact your adviser.