By Rebecca Ellis
WED, MARCH 04 2020-theG&BJournal- COVID-19 hit the markets with a vengeance in February. After dismissing the outbreak in China in January as a local affair, new cases in Europe, Asia and North America show that the virus has gone global. Uncertainty as to how the virus will spread and what harm it will do led to over-reaction and panic selling. Markets fell at an alarming rate for several days. Indiscriminate selling across all asset classes cost billions of USD. The performance that was built up in early February has vanished, and more. The markets are now pricing in a 50% risk of a recession and more support from the central banks in terms of more liquidity and lower interest rates.
This week’s sharp sell-off could rattle even the most seasoned investor. Have we reached the end of the wave of selling? It is possible we could continue to decline into bear market territory, but we believe the most likely outcome is a market recovery over the course of 2020 with continued volatility as the COVID-19 story unfolds. Reassuringly, March is starting with a much a calmer and more level-headed appreciation of the current situation.
The effects on the real economy in terms of disruptions of supply chains, loss of production and income, difficulties to service debt and possible defaults are hard to gauge now. There will be surprising turns of events as we discover the intricacies of just-in-time-delivery and global outsourcing.
There will be effects, but these will be temporary. A lasting effect that we can already witness is an accelerated trend towards remote working and teleconferencing. Companies with limited exposure to global production and supply chains are likely to do better for now. All other companies will adjust and will eventually go back to what they do best, and valuations will return to higher levels.
What should we do? We are keenly aware of the emotional difficulty of sharp selloffs and volatility. However, it is important not to overreact. Instead, preserve cash, check the portfolio composition, review the initial goals set for the portfolio and gauge whether each position is still fit to deliver on its promises. Changes to the portfolio should be very cautious and punctual rather than a big sweep. Any cash reserves will come in handy to purchase new positions or build on older ones as the markets prepare to turn for the better.
As longer-term investors, we find it usually pays off to look on the bright side when others are panicking. Virus disruption is unlikely to force the world economy into recession. We expect to see a large but temporary hit to economic activity followed by a bounce-back later in the year that additional stimulus could make stronger than it otherwise would be. It is time to prepare for the recovery. Most stocks are cheaper now and much of the market froth has dissipated. Be it dividend stocks, growth companies or small and medium caps, bargains abound.
Rebecca Ellis is a Personal investment advisor, based in Zurich|rebecca.ellis@pomonawealth.com|pascal.crepin@pomonawealth.com.
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