Back to Blog
Many clients are understandably concerned about their investments at this time. Not just whether they made need to fall back on them to support themselves, but also whether they should pull their money out of risk-based assets and into safer havens like cash. There are other investors who currently see this market correction as an opportunity. Here we offer some perspective and what it may mean for your long-term investments.
Coronavirus will pass, whereas fiscal stimulus has longer term effects: Bank interest rates are now at historic lows and we are seeing extensive central bank quantitative easing on a global basis. While it is hoped COVID19 is short-lived, these stimulus measures should support global economies for years, while reducing the risks of corporate defaults and supporting higher valuations for equity markets.
The best returns tend to come from desperate times: The best rolling ten-year equity market returns on the US Dow Jones Index were born from seemingly desperate times. Investors buying equities at the end of the two World Wars, during the 1932 and 2009 market crashes, and after 1987's Black Monday, enjoyed 10-year returns of 10-15%p.a.
Markets should recover before the economic and humanitarian crisis is over: Financial markets tend to move well ahead of economic fundamentals. Declines in global growth and corporate earnings may already be ‘priced in’ to a certain extent. Markets are already discounting much of the news and they will almost likely begin to recover well before the worst of the economic impact. The Chinese equity market is a good example. The market bottomed in early February when the virus peaked and began to slow down. The Chinese equity market subsequently fell further in recent weeks due to the weaker outlook for growth outside of China, but it is still one of the better performing major markets year to date.
Market falls may provide opportunities: As painful as large market declines can feel, the effect on valuations are only temporary, as long as investors don’t crystallise losses. For those making regular savings, or with additional reserves to invest, lower valuations mean more shares can be acquired. This ‘dollar cost averaging’ effect creates greater value over the long run. For lump sum investors with new money, our advice might be to phase it in over a number of months to reduce the risk of poor market timing. We expect Q2 corporate earnings and economic data to be dire and if worse than expected, may cause further volatility so we prefer a phased approach.
The message is not to panic and stay invested. Markets will always have corrective periods but what history tell us at least, is markets overcome every event that has been thrown at them and move forward. Keep the long-term vision!