The impact of Covid-19 on markets

Despite the extreme volatility, now is not the time to panic.
Image: Bloomberg

No one really has any superior knowledge or insights into the impact of Covid-19. Everyone in these tumultuous times operates on imperfect information when assessing the impact of the virus.

What we do know however is that things are likely to get worse before they get better. China’s recent manufacturing and demand slump will likely affect activity in the rest of the world with a lag of a few months. In addition, the demand for services, including travel, tourism, events, entertainment and restaurant meals, are likely to contract due to containment measures that are in place or in the process of being implemented across a number of regions and countries.

The fluidity of the situation can be seen in the data being reported by various governments on infection and mortality rates, as well as fear on the part of investors, spread largely by the media. The reaction of global markets and the changing forecasts and outlooks from global banks are also a moving target.

What’s important to note is that the current episode emanates from an external shock or event. In this respect, the situation we find ourselves in is different from the financial crisis of 2008, which was a systemic event. In a sense, the current episode is more similar to 9/11. However, it is possible that the wider impact of the virus leads to something more systemic. The market has already priced in the extent to which the exponential proliferation of Covid-19 increases the probability of a regional and/or global recession.

The bottom line however is that the ultimate impact is unknown and we believe it would be hazardous to make point estimates at this stage. Instead, we think it is more useful to ensure that our portfolios are appropriately positioned for their given risk profiles to allow us to weather periods of heightened volatility such as we are seeing at the moment.

Volatility reaches a record high

Europe has become the epicentre of the global pandemic with a number of countries closing their borders and effectively putting large parts (if not all) of their population under quarantine, while others – including South Africa – have declared the outbreak a national emergency. The speed at which the market has corrected has been truly staggering, with the S&P 500 falling by its largest daily drawdown since Black Monday in 1987, on two separate occasions in the past month. Yet in between these two days it also recorded its largest daily gain since 2009. Given these wild swings it is no surprise that the VIX has also recorded its highest closing level on record – even higher than during 2008.

We had expected policy responses from central banks and governments and it was the central banks that delivered first, at least those in a position to do so, by easing monetary policy in an effort to prevent a further tightening of financial conditions. Investors have in particular been watching the US Federal Reserve. With even the US Treasury market showing signs of illiquidity and poor functioning, the Fed delivered an extraordinary amount of liquidity via repo facilities, to ensure the proper functioning of arguably the most important market in the world – the US Treasury market and the funding channels that rely on these securities as collateral. This has now been extended to include various programmes to support the effective functioning of markets while aiming to provide funding where it is needed. While these actions may have alleviated any immediate pressures in funding markets, we need to see that this has indeed been effective as time progresses.

More significant yet was the Fed announcement of a 100bps decrease in the Federal Funds Rate to 0-0.25% and a return to the crisis era effective lower bound for US interest rates, thereby exhausting their most conventional policy tool. In addition, an asset purchase programme which is effectively open-ended, has been rolled out that will see the Fed extend its current asset purchase program beyond bills and will now include coupon securities across the curve as well as agency mortgage-backed securities, corporate bonds and ETFs.

Initial market reactions suggested a broad disappointment with the level of monetary policy intervention but with the baton passed firmly on to governments, we have since seen an unprecedented level of fiscal stimulus measures being planned and delivered. The UK government has already moved to provide £350 billion to support businesses and households during the crisis. Across the pond, the US Senate appear to have brushed aside their differences with the imminent approval of an approximately $2 trillion stimulus package in response to the pandemic. The bill, the largest of its kind in modern American history, is also aimed at providing support to struggling business and households, as well as providing additional and critical support to hospitals.

It is of course too early to determine if these measures will follow through and have a lasting and meaningful impact that is consistent with their intentions, however markets are all about expectations and market reaction has so far been broadly positive.

What should investors bear in mind?

It’s important that investors keep a few things in mind in the context of the current market volatility:

  • Now is not the time to panic. In times of extreme market volatility, it is important to stick to your investment strategy. Selling on extended weakness is not a winning strategy over the longer term.
  • We do not think it is appropriate to make significant portfolio changes at present – with heightened volatility, it is easy to get this wrong. Liquidity may also be limited, potentially compounding mistakes when trying to make significant changes to a portfolio. A recent comment from Goldman Sachs’ Investment Strategy Group made this point very well, “when the market is generating a typical year’s worth of gains or losses in a single day, the penalty of trading missteps is high.” Changes to portfolios should not be made to try and time the market in an effort to generate outsized absolute or relative returns but rather to rebalance portfolios to an appropriate asset allocation.
  • As unattractive as high-quality global fixed income assets may appear from a valuation or yield perspective, they still warrant a place in a diversified multi-asset portfolio. Fixed income is the one asset class that has consistently proven to provide negative correlation (and therefore something of an offsetting effect, or ballast) to equities or other risk assets.

In conclusion, as with any material event that impacts markets, there is a beginning, a middle and an end – it is important to remember that this too will come to an end at some point. The timing is uncertain but that reinforces the need for a longer-term time horizon. Some markets are likely to be oversold in the short term but this does not necessarily mean we have reached the end of the current episode.

Paul Wiseman, is a senior investment manager and James Newell is a senior investment manager at Maitland.

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Italy is widely accepted as a “worst case scenario”. Yet, if we take the human cost aside and view this situation without emotion, the following are facts: there have been 14 500 deaths from coronavirus versus Italy’s 5 year average of 650 000 deaths per year. And many of those 14 500 deaths were economically inactive people, and people that would have passed away shortly in any event. My point being, from an investment perspective, sooner or later (probably as hunger sets in), people and governments will calm down and return to work. Buy into this weakness and hysteria while it lasts…may last 2 months or 2 years, who knows, but the fact remains that this downturn is not the “apocalypse” end of the world “ walking dead zombie type disease, but a case study in mass hysteria. Thus, a great buying opportunity!!!! Markets will recover!!!

I salute your unpopular but correct logic. This is a mass hysteria epidemic. The virus itself is a non-event, but the competition to “save humanity” will kill many people. Lockdown sets the maltusian trap. You cannot isolate yourself from hunger.

Article by a fund manager void of any direct selling of fin-services or advice ….just wisdom and guidance

Nice. To bad e.g PSG cannot follow this example

What’s the beef with PSG?

comparing to 911 is a good point : external event. But a key difference is that before 911 markets were not as expensive as February 2020. For comparison, now the total market cap : gdp of the US was close to 150% (as high as the crazy days of March 2000). Before 911 it was 107%. The looong term average is more like 95%

Prices were crazy and ready for a slap at the end of an 11 year bull market. 911 we were 18 months after the March 2000 corrections.

So, if you were mostly cash coming into Covid – when to go back? S&P probably can go to 2100-2200??

First world wisdom doesn’t apply to South Africa.

Of consequence is that the country entered the crisis in recession & bankruptcy and will likely emerge from it with a depression.

The fact that our currency has slipped 25% and our equities another 20-30% suggests that the world values South Africa Inc at just above 50% of what it was worth a few months ago.

That speaks volumes about market expectations.

And if the virus isn’t flushed out, Africa will remain on the travel ban list for years to come. Bye bye tourism and FDI.

In Nov I switched some units (not enough) into a Global Cautious fund, this has done stunningly well. Unfortunately also retired some RA’s and took the R500k tax free ammount which is now sitting in SA Income funds waiting for an opportunity. It is safe to say that this is quite depressing.

I read the following article which really helped to cheer me up.
https://dynasty.co.za/where-to-rand/

The author is a really credible guy.

Thanks for this,

Yes no surprise commodity producing countries are taking a beating as investors are betting lower resources prices.

South Africa’s rand also pricing in a lot of internal risk (budget and trade deficits widening, weak governance).

What SA should be doing now that imports are frozen is exporting as much as it can to help the rand recover.. Pity these export industries have been locked down. Doesn’t make sense to me. Lets declare these ‘essential’ and at least get a trade surplus.

From my research, the only recipe for a stronger rand is a commodity bull market. Been like this since the 1970’s. That looks a bit unlikely tho.

If you are looking to hedge rand risk, at the very least, consider buying local gold in rand terms.. Although hard to say direction of rand in short medium term. In the long term, you can almost safely say its worse.

Please tell us when to panic.

These ‘Financial Advisor’s View’ with – Comments Closed – must stop. If we cannot comment in those articles don’t publish them.

One of the main reasons I cancelled my subscription was all the pay for play articles.

There are pockets of opportunities in any market, it depends on the quality of those opportunities and risk management. Per the Alex Forbes large manager watch and 27four surveys the bulk of managers have underperformed for extended periods PRIOR to the recent events, the bulk of them will continue to underperform. Rather choose a low cost index (70%)and choose your own top 5 stocks(30%) for returns. You won’t do worse than the “experts” who are closet index trackers anyway

I agree with most of the article, making decisions during a crash or implementing emotional knee jerk strategies never works out. I think most will agree that this like 2008/2009 will have, probably 2 more panic sell offs before it is done. The economical damage is by no means factored in yet to the markets. I would not be surprised to see another plunge into the 19k area on the DOW, possibly even 17k and maybe in a final spike down sell off at the extreme 15k, before a roaring return.

The ZAR at 19.00 will be a short term windfall relatively speaking for the mining/ export fraternity, as there is always a 6-9 months lag before real manufacturing/ production costs catch up, however, if we continue to press lower, then this extends maybe for some time to come.

One thing i do disagree with is even considering putting money into ‘high-quality global fixed income assets’, especially if they are sovereign debt instruments. They are not a safe haven this time, this is a crisis of confidence – governments just decided to slaughter the peoples jobs (faith in governments globally has been and will be shattered further in the coming weeks and months), not based on sound science or medical facts, but on institutions with shocking track records – making apocalyptic assumptions and extrapolating them into infinity in a linear manner, which never happens in nature. Does no one question these private organisations conclusions and that they may be agenda driven, as they all rely on grants and donations to survive – their teams are the most highly paid in the world, these include but are not limited to WHO/ Imperial College/ John Hopkins/ CDC (yes private), who are now having billions of $$$ rained down on them. Is Neil Ferguson the devil incarnate? Back tracking already multiple times, but still unable to break from the global government narrative to assume the worst or his own employers.

I am sure we have all watched or read the MINORITY REPORT and their Precrime division – we are living in a version of that science fiction novel, we could call our governments PRECOVID divisions. Acting and enforcing crushing economic conditions, on something that might happen – based on what. How about a bit of wait and see, gather real data and scientific facts before crushing the world. The saying of making ASSUMPTIONS is there for a reason. watching RSA shut down in the most brutal way, probably in the world with even today only 1500 cases and 10 deaths, in Mozambique it is worst, they have only 10 cases and no deaths, go across the continent it is even more bizarre, no cases and still lock downs – go to https://www.worldometers.info/coronavirus/ – it is quite accurate. What is more telling is if you can be bothered, recreate that table on a small scale choose 10 countries and superimpose the data of a new annual flu season such as the UK or the USA and refill each column with just flu data. It makes the ‘SCARY covid’ spread sheet look kinder garden pedestrian by comparison.

Sorry i got side tracked above – There is ample evidence and has been for several months and longer in the case of the EU, that global government debt markets are just not functioning any longer. Without the ECB monthly interventions the EU would already be in a great depression, covid 19 or not. They can never sell, same as Japan. The last relatively speaking functioning market, if we ignore the REPO spike to 10%+ last year and the ongoing massive repo interventions to keep it functioning, is the US debt markets. However, really big money can only really go into 2 places in the world, the EU (Euro) and as always the USA (USD). No one in their right mind will invest in the EU or their debt now, hence the relative and inexplicable to some, dollar strength recently. For sure the USA has its own debt problems but they are probably lagging 24-36mths behind those of the EU, maybe 48mths. This is all of course only my opinion but if you are in cash, i would rather cherry pick some ZAR defensive stocks if limited to SA, or bell weather stocks overseas when the next legs down come which they will surely do. What trigger you ask – this coming weekend in the UK the formalisation which is almost a certainty of a further 3 weeks extension to the lock down and similar action from the USA, will cause another round of panic as people start re-crunching unemployment numbers, jobs lost forever, further plunges in GDP etc and an imminent wave of debt defaults coming globally that are largely not covered by government support programmes not even close – many companies will go to the wall as will many institutions, banks hmmmmm … remember the firmly entrenched Cyprus BAIL IN laws which are now prevalent throughout the EU and the UK, which most people are blissfully unaware of.

Can you say PROPORTIONATE RESPONSE, not one first world country can now say they are acting proportionately to what the daily data becoming available is telling us. Each day the actions already taken with 4 billion people under house arrest, look more and more bizarrely and exponentially disproportionate. I love the fact that Sweden is giving the rest of the world the bird and acting normally and proportionately to the perceived threat, although i suspect they are under ever increasing pressure to toe the UN global party line. Look at the link above there are mainly 5 noise makers in the figures that are generating the global headlines – USA/ UK/ ITALY/ SPAIN and FRANCE. Most every other country is relatively speaking doing exceptionally well by comparison – but dig deeper, these 5 poster children are in this relative condition (which is not a big deal in the bigger and real picture to unfortunately only be revealed a year from now), because they have for 10-15 years practiced massive austerity, they have been introducing tax increases whilst simultaneously cutting back on social and medical services – UK NHS staff down 43,000 from its peak, ITALY, SPAIN and FRANCE are even more shocking by comparison, but they all tripped over in bad flu seasons in the last 5-10 years it was not news then. The USA is wholly unprepared for a variety of political reasons but largely they boil down to the same issues in Europe and UK.

If the EU and the 1st world have imposed totally disproportionate responses, to at best untested doomsday projections based on barely any data and at worst hidden agendas that will soon become apparent. Christine Lagarde has been making regular speeches this week regarding the desperate need for a digital currency, maybe they are already starting to emerge.

Then what did South Africa and the rest of Africa do – with barely any cases and no deaths, there was no proportionate reason to justify their draconian actions, yet almost in 1 or 2 weekends African leaders within hours read from the same hymn sheet – Museveni/ Kenyatta and Ramaphosa did it on the same evening, a little too coincidental or ominous for my liking. They seemed almost gleeful and excited to impose these sanctions on human freedoms and rights, welcoming the massive power and control it brings them overnight – maybe i am a little cynical :). Are we really practicing social distancing in SA – 9 in a taxi!? Come on please pull the other one. We have/ had natural social distancing in SA, which was actually reversed by the lock down. By that i mean shacks housing 20+ people now on top of each other in townships, travelling 9up in a taxi to get basic necessities daily, will cause this little virus to spread much faster than would have otherwise been possible – no i am not mad. The very nature and structure of our economy, means that the largest part of the work force in general work hundreds of kms or more from their homes (current shacks), in their employer provided accommodations and hostiles, yes not always ideal but certainly better than 20+ in somewhere the size of an average kitchen. In the process the masses travelled in buses and taxis from urban centres to these new focal points of concentrated people virus breeding centres – to get home before lock down – and now?

An erudite post on another article – mentioned … victim attitude or slave mentality that motivates exploitation … – of the massive powers that government now has. I would like to add one more if i might Sensei and that is a massive culture of entitlement that is so prevalent amongst our elite and their minions in the ANC and deployed cadres in the SOEs.

The RSA lock down when looked at logically is ridiculous and actually causes the opposite to social distancing and therefore the stated objectives of this lock down, which is the safety of the public – which is nonsense. History and numerous power grabs tell us differently. If public safety is really a concern, why create overnight a powder keg for massive civil unrest and sky rocketing crime. Which is exacerbated exponentially every day we stay in lock down. Abuse of power, abuse of spot fines, God complex which many authority figures had in abundance before the lock down will explode. But forget not, that our nation is well schooled and trained and no strangers to massive unrest and uprising when needed – worst still are the highly militant, very violent and often murderous strikes and protests we see all too often, taught by the very same leaders that have now placed this naturally militant populace under house arrest. Each day when it becomes apparent that tens of thousands of jobs will never come back, how long will this nation stay quiet before spilling out onto the streets in protest? I would hazard a guess not that much longer – beware for you will reap what you sow – God forbid you unleash another Marikana or Sharpville with police and military panicking by the sheer number of people descending on them.

We have the largest welfare state in the world – the tiny part of the population that funds this currently exponentially increasing number of welfare recipients, are also under house arrest, have also lost tens of thousands of jobs, cannot buy cigarettes and even go for a jog. But you can travel 9up in a taxi from your 20+ digs each day to buy essentials in the town ships – WOW, difficult to wrap your head around isn’t it.

With the ZAR at 19.00 – the international investors look at what is coming down the road, i believe it would be close to these levels without the Moodys and Fitch downgrades. Even interest rates at 20% now will have little effect – maybe it would have taken an extra week or so to reach these levels – just an opinion. But from the coal face, we export 10 times more as a company than we import, at the moment we can do neither. We have additional armed guards and dogs at all premises in RSA as we have already suffered multiple break ins and attempts, similarly in our operations in neighbouring states. This only after 9 days of lockdown.

Let us hope this lock down is lifted soon, i do not think South Africa will accept another 3 weeks like the UK will.

More worried about the impact of the ANCon markets.

End of comments.

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