And breathe. That was without doubt one of the most volatile and precarious starts to a year for markets that many of us have witnessed in our lifetimes. And clearly for good reason.
As you will know, whether from watching the news or if you managed to catch a glimpse of our blog posts, which are still available to read on our website, the world has effectively ground to a halt due to the outbreak of COVID-19.
At the time of our first blog post about Coronavirus (28 February 2020), the virus had reached 55 countries; by the time we posted our second blog (13 March) this had more than doubled to 125 countries. As we write this today, 234 countries and territories have confirmed at least 1 case of COVID-19, with just under 2.2 million individuals testing positive for the virus. There are only a handful of countries that claim to have had no confirmed cases; these are either tiny islands or those whose information is likely spurious, unsurprisingly North Korea is one of said countries to have no confirmed cases.
There are an array of words and sayings that weren’t part of our vocabulary now, but are used more and more frequently everyday .. here goes (with some hopefully helpful links attached):
Flattening the curve is a key focus for Governments; which is whereby the number of new cases confirmed aren’t increasing at an exponential rate (think of this as an increase in acceleration). This flattening will mean that countries should eventually reach a peak in the number of new cases each day, before eventually beginning to decline.
Many countries have initiated several measures to limit the spread, including enforcing a lockdown by people staying indoors (enforcing self-isolation), and for everyone to be social distancing … I think we have all become experts in gauging 2 metres. The more vulnerable have had to shield themselves.
Scientists tirelessly research a vaccine and cure whilst key workers continue to keep our country going. Whilst a vaccine is not yet ready, the effectiveness of herd immunity has often been mentioned as a possible way to control the virus. This is whereby the population build up an immunity to the virus such that it is unable to spread effectively (of course herd immunity would be significantly easier if there were a vaccine).
The markets reacted extremely negatively to the news, at a lightning pace. It took just 14 trading days for UK equities to fall by 30% in value. Over in the US, it took their equity markets 22 days to fall by the same magnitude. To put this in perspective, during the Global Financial Crisis (GFC) in 2007-08, it took ~250 trading days for markets to fall by the same amount. This was at a time when where the stability of the entire financial and banking sector was called into question and hung in the balance.
And of course the economic implications are plain for all to see. Governments around the world have had to step in to financially support businesses, the working population, charities and other entities (fiscal policy). Central banks have also stepped in to support the financial markets through a combination of cutting interest rates and further quantitative easing (monetary policy).
It is of course difficult to say at this point the magnitude of the effect this will have on global economic growth. China have released their GDP data for Q1 2020 which shows a fall of 6.8%, the first quarterly contraction in a record of gains going back to at least 1992 and their worst annual growth (effectively flat for the 12 months to end of March 2020) since the late 60’s. Expect a similar trend as other countries report their economic data.
The International Monetary Fund (IMF) having estimated global growth of 3.3% for 2020, are now forecasting a contraction of 3.0% for the year, which would make it the worst year since the great depression. As a comparator, global GDP fell by 0.1% during the Global Financial Crisis.
Naturally, it is easy to use 2007-08 as a yardstick from which to judge the current situation, it is the most recent economic slowdown prior to this, although it feels like a lifetime ago! However, as is often said, it IS different this time. In the aftermath of the Global Financial Crisis, employment levels, as well as several industries and many businesses, were taken out at the knees, for reference it took nearly 8 years for UK unemployment figures to reach their pre GFC levels.
Prior to the lockdown, the global economy, for all intents and purposes, was in a fairly good position. Some may argue that we were at the late stage of an economic cycle; but signs pointed to continued economic growth. So when this lockdown does end, one would like to think that the economy is positioned to rebound sharply.
But of course, this all hangs significantly on the question, when? When will a vaccine and cure be found and when can we end the lockdown and social distancing?
To elaborate on the previous IMF estimates, the institute forecasts global GDP to rebound sharply in 2021 to 5.8%; although this is on the basis that the pandemic peaks in the second quarter of this year. According to the IMF “If the pandemic continues into 2021, [global economic growth] may fall next year by an additional 8% compared to our baseline scenario”.
As previously mentioned, markets reacted ferociously as the threat the virus presented came into sharper focus. The VIX (Volatility Index), which aims to measure the volatility of the S&P 500, hit an all-time high on March 16 of 82.69. A figure above 20 is considered high whilst a figure below 12 is considered low. But it was the fact that nearly every asset class was sold off during the second week of March that was perhaps most surprising. Sure, in a time like this, a sell-off in equity markets is a given. But the sell off during this time, like the Coronavirus, did not discriminate. Typical safe havens like government bonds and gold took a hit around this time, as investors dashed to cash, or perhaps sold off these assets to raise liquidity, rather than sell the assets that had fallen far worse.
This leads us on to one of our key mantras when it comes to investments and managing money, it is all about time in the markets, not timing the markets. During the first two weeks of March, it could have been easy for investors to panic, cut their losses and sell out given all of the uncertainty.
But, as we know, this would be the wrong approach. It is easy for emotional biases to take over and for investors become irrational. This is in part why a robust Risk Profiling Process and a suitably mapped risk rated investment strategy is so important. Of course the downturn that we saw in markets and therefore in our MPM portfolios wasn’t pleasant; but the drawdowns we saw across our portfolios were in line with our pre-crisis estimates for each of the respective portfolios.
The drawdowns that we saw led to a large majority of investors in Discretionary Fund Managers receiving a notification that their portfolio had fallen by 10% or more since the start of the year. The effectiveness and usefulness of this relatively new regulation have been called into question by many in the industry, as this is another potential trigger for investors to react irrationally. The regulator has subsequently paused the rule until October.
To highlight the point about not trying to time markets, since our MPM portfolios reached their lowest point over the year to date (19 March 2020), our most adventurous portfolio, MPM100, has regained 40% of losses, MPM060 has recovered 50% of losses and MPM030 has recovered over 70% of losses (as at 17 April 2020).
The current market turmoil has also largely been impacted by the ongoing saga in the oil market, which was in part affected by the pandemic. At the start of March, the Organization of Petroleum Exporting Countries (OPEC) presented an ultimatum to Russia to cut production by 1.5% of world supply.
Russia, which foresaw continuing cuts as American shale oil production increased, rejected the demand. This came on the back of an agreement in December 2019, in which OPEC and Russia had already agreed to one of the deepest output cuts.
Saudi Arabia reacted to Russia’s refusal by increasing the output and offering a discount of $6 – $8 a barrel to customers in Asia, the US, and Europe. On the back of the announcement, oil prices fell by more than 30% in one day.
Combine this continued supply and discount with a significant fall in demand, not many people are driving or flying right now, it is clear to see why oil price volatility is so high. In fact, at time of writing, the WTI Oil Future for delivery in May 2020 turned negative, the first time this has ever happened, reaching as low as -$40 per barrel. This means you were being paid $40 to take a barrel of oil off producer’s hands! This perhaps highlights the issue with storage and how full reserves are at present.
So where do we go from here? Clearly we are not out of the woods yet; as the IMF stated, a lot depends on how long it takes for current circumstances to change. We could well see markets retest their previous lows, but then we might not. For us, it is not about trying to second guess and to time markets. It is ensuring that our portfolios remain well diversified and that the appropriate risk is being taken. We have towards the end of last quarter been adding positions to areas that we feel offered good value, but we continue to retain an element of cautiousness.
To read the rest of our Portfolio Update Q2 2020, please click here.