Wednesday 11 March, 2020
On Monday 9th March, global share markets plunged by over 6% bringing the cumulative market fall from recent highs to just under 20% - and wiping out all of 2019 gains.
While the short-term trigger for this drop was a breakdown in talks between oil producing nations (that resulted in Saudi Arabia flooding the market and driving oil prices down by over 25%) it also reflects the increasing ‘pandemic’ threat of Covid-19 and the associated economic disruption and knock on effects across a range of categories and sectors.
Shares in the US subsequently enjoyed a late-afternoon boost on Tuesday as a rise in oil prices and promises from the White House to take steps to protect the US economy helped markets to recover some ground one day after the biggest falls since the 2008 financial crisis.
In this ‘nervous’ market climate, we think it’s vital to focus our clients on what we can expect from here - and what your 100% Kiwi investment team is already doing, to protect your wealth.
THE 3 STAGES OF FINANCIAL MARKET PANIC
Over the last thirty years the collective team here has experienced a whole range of market crises - going back as far as the crash of 1987. While the causes are always different, the course of events is very familiar - and characterised by three main stages:
1. The Initial Selloff/Panic
Generally this begins with markets on a strong run, assets looking relatively expensive, but underpinned by solid economic fundamentals - before a new or unforeseen set of events trigger a rapid loss in confidence.
Mostly, these effects fizzle out and markets recover - but occasionally lead to a crisis in confidence, collective fear take over and a full on rout sets in. Monday had all the hallmarks of panic and capitulation and places us firmly in this phase.
2. The volatile aftermath - and a new low
This is a time of scary headlines - with markets rising by as much as 5% one day, and falling 5% the next. New lows may be reached - but gradually the fear resolves, winners and losers emerge, Central Banks and Governments get their act together and concerted monetary (interest rate) and fiscal (tax and spending) responses are actioned. Volatility and volatility measures (like the VIX index) fall. Markets go sideways.
3. The Recovery
The monetary and fiscal stimulus kicks in, dust settles, economies get back to work, growth returns, assets look cheap and markets rise. Interest rates stay low and underpin confidence. Inflation stays low and investors feel the ‘party’ restart - with long term gains once again tending to cancel out short term losses over time. Shares rise in value but with usually at least one large correction in this phase.
Equity markets can recover in as little as 6 months (which it will if Covid 19 turns out to be less of an issue) or 24 months (which is how long it took for markets to recover from the GFC).
KIWI INVEST’S INVESTMENT RESPONSE
All funds managed by Kiwi Invest in the client portfolios are well diversified and liquid - built to survive the immediate shocks and dips of market crises, and then thrive in the subsequent upturn. Economies grow over time - and so do equity markets.
Covid- 19 will run its course, whatever that course may be, and economic activity will head back to normal. Monetary (interest rates) and Fiscal (tax and spend) support is already happening - and while sharp lows in oil & energy prices are disruptive, they are ultimately stimulatory to general economic activity.
Kiwi Invest’s alternative investment strategies have already taken some of the edge off market falls. Fixed Interest funds have been conservatively positioned for some time with higher average quality bonds and shorter maturity investment, and our Global Thematic strategy is doing well, having moved away from the worst hit sectors.
The Kiwi Invest team are currently sorting through opportunities - that beaten up, but still good quality, bonds and shares present. At some point we will look to extend active risk to take advantage of cheaper assets.
OUR ADVICE TO ‘KIWI’ INVESTORS.
There is a possibility that Covid- 19 is worse and takes longer to play out than expected - and we can’t rule out further lows. But as has already been widely reported and commented on - the worst short-term thing that any investor can do, is panic.
A lot of money has been lost selling at the low and buying at the high - and trying to ‘time’ the market is often futile, whether you’re a leading commentator or a bedroom investor.
The important thing is to assess your personal situation. Do you still have your risk set at the right level?
In times like this, investors regret that they didn’t see recent events coming, cash up in advance (and consider all the future spending they’d already mentally ‘committed’ based on 10 years of expecting good returns) - it’s more important to have a clear plan, that incorporates your long-term goals and ‘risk budget’.
This plan is the cornerstone of our investment success - as we assess it in the light of new events, revise it periodically and follow it - staying in for the long haul.
If you have any questions or concerns, just contact your personal adviser directly, or call us on 0800 427 384. Rest assured that our team are hard at work, sifting through the opportunities, maintaining quality, liquid, diversified and global portfolios that will thrive in the coming recovery phase.