Despite concerted action from central banks, who have cut interest rates to record lows and are planning to inject cash in the markets, and governments, who have pledged vast spending to support their economies, a state of fear continues to plague markets.
With concerns about a collapse in consumption and production grinding the global economy into recession (or negative growth), many investors have effectively wanted to reduce exposure to the future. Almost all investment assets have been sold off to various extents, not least company shares and corporate bonds.
Rather than buying up government bonds – to the extent that would be expected, anyway – investors have made a dash for cash, especially US dollars, as a safe store of wealth. This has made it something of a perfect storm for diversified approaches to investing. Even demand for gold, another traditional safe haven, has barely budged as stockmarkets plunged.
As investors looking to navigate this period of upheaval, we have to ask ourselves to what extent markets are being driven by facts or by investor panic. Whenever it is emotion that dictates asset prices, our experience has shown us there will be opportunities for those with a rational, long-term perspective.
Proceeding with caution
By traditional measures, a lot of global assets certainly look cheap. But these can be difficult to trust when corporate profits look so uncertain. Indeed, investors’ inability to ascribe values with confidence is partly what is driving the fluctuations we’ve seen in markets.
This does not mean many assets do not now represent value. The scale of the fall in stockmarkets between mid-February and mid-March 2020, as well as its indiscriminate nature, indicates to me that it can’t be fundamentals alone that are driving prices, but also panic.
Until we see strong signs of value ‘biting’ in asset prices – when they reach resistance levels rather than continuing sustained declines – I am only confident dipping into attractively valued parts of the market with care; rather than ploughing into them in scale.
We clearly have challenging months ahead of us, and negative sentiment might continue to suppress asset prices, possibly pushing them down further over the near-term. We can’t know for sure, meaning we should proceed with caution as we look to act on asset prices that seem detached from fair value.
Light at the end of the tunnel
If we look beyond the next few months, I believe there are grounds for optimism. On March 18, China confirmed it had no new domestic cases for the first time since the coronavirus outbreak began in the country. This is clearly encouraging.
I would argue that once the health crisis is hopefully over and the number of coronavirus cases starts to slow, investors around the world will start to focus more on the fundamentals again. The market has largely ignored the benefits that lower interest rates and higher government spending could have in boosting economic growth after the crisis abates.
Crucially, the recession we are entering is not like the global financial crisis of 2008. That was a product of the misallocation of capital across the financial system. This time, in early 2020, we face a virus-led recession that does not reflect any fundamental imbalances in the global economy.
The psychology of markets may continue to prevail throughout this healthcare crisis, but I am confident that it will present long-term opportunities for active investors willing to go against the tide.
The value and income from a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
The views expressed in this document should not be taken as a recommendation, advice or forecast.