Since our last markets update the Coronavirus has spread into Continental Europe and North America. In a bid to limit the spread, Governments around the globe have placed unprecedented restrictions on the movement of their citizens. These restrictions will come at a cost. At best economic growth will be subdued, in all likelihood some economies will experience recessions as a result of these restrictions. In the midst of this turmoil, Saudi Arabia took the opportunity to launch an oil price war against Russia, which has seen oil prices decline by a third.
Pleasingly, we have already seen a response from central banks around the world as they seek to provide monetary stimulus and stabilise markets. For instance, the US Federal Reserve has made two cuts totalling 1.50% and the Reserve Bank of NZ has cut the overnight cash rate by 0.75%. Governments around the world have already signalled a willingness to mitigate the economic impact of the unprecedented restrictions by raising spending. For instance, the NZ Government recently announced an economic support package worth $12.1 billion, which is an impressive 4% of GDP. This includes $5 billion in wage subsidies, $3 billion in business tax changes and $3 billion in income support.
The reaction to these developments has been a meaningful market correction. As we gyrate between Coronavirus related fears and the hope that intervention by governments and central banks will stimulate economic growth, it seems likely that the large swings we have seen will continue in the near term.
As active investment managers, we have been monitoring markets very closely, seeking to reduce investment exposures that represent elevated risk while selectively adding high-quality assets that have become available at attractive prices.
Prior to February, we had positioned the funds with higher levels of cash than normal as markets had risen to all-time highs and we expected some form of pullback. Whilst we could never have predicted a coronavirus pandemic, it has arrived and been the trigger for a selloff. The additional cash has allowed us to soften the blow somewhat.
It is important to remember that share market corrections are not new. One of the founding principles of modern finance is that in the long term, investors should expect higher returns from share market investments than bank deposits, but in return, they have to accept a bumpier ride.
While the shocking headlines may make it tempting to shift to a fund with less growth assets we think this strategy is risky. Predicting market movements is tricky at the best of times. The large swings in market sentiment driven by news of restrictions and measures to prop up the economy make timing a switch even more challenging.
A Wall Street proverb worth remembering is that “A bell does not ring at the bottom of the market.”
It is also worth bringing to mind a famous quote from legendary investor Warren Buffett: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
In the meantime, you can be assured that our collective experience and investment in the funds alongside you places us well to navigate this turbulence on your behalf.