While the threat of coronavirus was very real over a month ago, many countries were only just waking up to the magnitude of the issue and were still making relatively light touch changes to their monetary policies. Now the world and its economy have drastically changed.
Most countries have now defiantly stood up to the virus and introduced a package of measures that were unthinkable even just a month or so ago. These changes to monetary policy and money supply are seemingly working by propping up the markets and there has even been some recent positive movement in the broader markets.
While of course this is encouraging, this crisis is sadly far from over. The impacts of the huge changes in consumer demand are yet to be fully understood and similarly the monetary policies designed to soften the economically catastrophic consequences may be short lived or ineffective. Volatility is never far from the door.
The potential costs of the generous stimulus programs and welfare measures initiated by most governments are eye watering and amount to an economic experiment on a scale never seen before. Although the full ramifications of these measures and the virus itself are still up for debate, it’s highly likely that we could be heading for a deep recession.
For this reason, while returns remain attractive in the long-term, investors should be careful of trying to time market moves in the immediate term as markets could yet go lower.
Historically the share price lows during such periods have not come about until much later in the crisis and therefore the recent short-term rallies, which have likely stemmed from the announcement of monetary policies, should be treated with caution.
Timing the market is a very difficult thing to do and you are better off staying the course on your core asset allocation, so you do not miss out on the best days in the market.
This is well illustrated by the fact that over the last 25 years, an initial investment of SGD 20,000 would have seen an investor who stayed in the markets throughout the period have a potential return nearly three times greater than that of an investor who missed the 25 best days by repeatedly cashing out and buying back in.
While it’s evident that past figures cannot predict the future, if we take for example the FTSE All-Share index, during the global financial crisis it did not reach its lowest point until week 25 following the first falls. Similarly, during the 2002 period of weak global growth markets didn’t reach a low until 39 weeks into the period of volatility. Both of these periods saw multiple market rallies, but these ultimately faded out as volatility remained.
The S&P 500 shows a similar trajectory, though it has traditionally rebounded quicker from an economic slowdown compared to the FTSE All-Share.
Clearly there are large unknowns in the ongoing crisis, namely how long will the pandemic last, the efficacy of the stimulus packages, market reaction to updated data on economic fundamentals, we believe you should not lose sight of your long-term financial goals. There is potential for more volatility within the markets, coupled with opportunities in healthcare, IT and communication services sectors which could help you add some tactical alpha to your portfolios.
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