Corona Virus Chronicles (V) - Ostrich Syndrome
Clients rely on Advisers to provide them with the means to invest into financial markets and in this age of low interest rates there has never been a greater need for this relationship.
Financial Market Reaction
“It is difficult to think how much worse the reaction in the financial markets could now get. But it will get worse” CV Chronicles (iv) 12thMarch…..Equity Markets down 10% and more …..
The US Federal Reserve (US equivalent to the Bank of England), yesterday felt that there were stresses in the US Dollar based banking system. It promised to provide 1 Trillion (that’s 12 zero’s worth) of short term loans to the Banks involved in US Money Markets. The very fact that it needs to do this suggests that banks are becoming wary of lending to each other. The Fed has promised to increase this amount as and when it is needed. It is expected that QE will soon be resumed; a targeted approach to provoke a flatter yield curve which has steepened over the past few weeks as buyers reach for the safety of short dated Government Bonds. This Central Bank response has been mirrored overnight in Asia.
Has this helped?....Well the Japanese Nikkei has fallen a further 6%, although the Chinese markets have stabilised and Australia is in positive territory after it’s record drop over the course of the week. At the time of writing it is probable that the positive lead from the equity futures market will flow through to the full indices.
“Calm down nothing to see here”?! If only it were the case.
Clients rely on Advisers to provide them with the means to invest into financial markets and in this age of low interest rates there has never been a greater need for this relationship. The advice clients receive tends to be, quite rightly, to invest for the long term and “ride out” the financial bumps along the way. Generally, this is good advice. However, this market time is not a “financial bump” and clients need to be advised to take appropriate action.
Generic comments abound along the lines of “sit tight, markets will recover”, or “we have seen this before”. The fact is that we have not seen this in our living memory, and at least not for 100 years. The problem with the “sitting tight, markets will recover” stance is that it glosses over a period of extreme volatility which might have poor investment outcomes.
It may well be true, eventually, that markets will recover and sitting tight, perhaps for a long time, may put you back to where you were before this sell-off commenced. However, would it not be better to be able work from a base of certainty (cash) to enable a portfolio to be repositioned to take advantage of the new opportunities that will certainly present themselves?
It is a difficult decision to sell one investment in a portfolio which has gone down and is losing money, in favour of another investment which has also gone down, even though it may have better potential for the future. In short, it is difficult to adjust investment strategy and asset allocation when in a position of weakness.
We took the view that, in this dire situation, our clients should be 100% in cash and despite the falls of this week, that is still our position.
Saying “we invest for the long term and markets will recover” disguises the truth around days and weeks of anguish and worry for clients as this market turmoil rapidly advances (as it surely will). It is better to act as you know something is happening. It is better to sell to avoid potential large falls than remain invested for a potential small gain.
Equity and more importantly, credit markets were already highly valued, to the extent that the expansion of the virus has become the very excuse investors are looking for to make that switch into a defensive strategy.
As an aside…In consideration of this last point on valuations, the competition element in investment markets has to shoulder a lot of the blame. The constant pressure on investment managers to “perform”, to “outperform” to receive a coveted “5 star best in the world” rating, turns investing into a competition. The only way to be in with a chance of a good rating, since the GFC of 2009, is to be in the market with both feet and big boots, to take on more risk. IN effect, being fully invested with as much risk as possible. Thus advancing “buy the dip”, which in turn has led to this high valuation, high risk juncture. …….
But back to the “stay the course” or platitudes of complacency. When confronted with something as awful as this, consider the famous Milton Keynes quote:
“When the facts change, I change my mind. What do you do?”
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About the Author
Peter Smart, Head of Investments
Peter has been involved in investment markets since 1985, working within the private client areas of two global banks and for 22 years as the fixed income specialist for the UK Wealth manager, Brewin Dolphin. More recently Peter formed part of the investment team at bridport in Jersey specialising in the provision of specialist, income focussed portfolio’s.