Over the last few weeks we have seen markets come to grips with the harsh reality and economic impact of the Coronavirus. However, it is important to maintain perspective and look at the longer-term picture. Currently the level of uncertainty is scary, which explains the severe price-action we’ve seen of late. Yet, it is vital to keep your wits about you and stick to your investment and retirement plan.
MARKETS HAVE DIVED
The JSE Top 40 index is now down 14% month-to-date and down 24.5% year-to-date, while the S&P 500 index is off 15% month-to-date and 22.5% year-to-date, in US dollar terms. To put the market moves into perspective, the domestic stock market is now back to where it was in December 2013. Markets, globally, are alive to the threat that the world economy will potentially slow down dramatically. Severe measures have been put in place to contain the spread of COVID-19. A crack down on human movement has impacted underlying economies and activity has ground to a halt in certain sectors.
When markets started slowing down, central banks were expected to introduce stimulatory measures, with the European Central Bank (ECB) predicted to whip out their monetary bazookas. Instead the ECB’s stimulus measures surprised on the downside, and risk markets tanked further. The Federal Reserve in the US later added quantitative easing of their own, via Treasury purchases, which supported the equity markets for a short while. Overall, Thursday’s significant market drop saw the dollar strengthen around 1%, yet gold fell by 3%. That was very surprising, but gold got off lightly compared to its friends, the platinum group metals. On the day, platinum was down 10% and palladium down 20%.
EQUITIES ARE NOW PRICING IN BAD NEWS
The role of markets is to discount known information into future valuations and reflect this in current prices. In other words, market pricing is the result of the equilibrium between risk and expected reward.
So, as alarming as current movements may seem, the situation simply demonstrates that after years of reaching for record price levels and sky-high valuations, markets are finally returning to earth for a long-overdue visit. In reality, it’s not the extent of the current drawdown that is so spectacular, but rather the speed at which it happened. In just two days, the S&P 500 index shed 12% and the JSE followed suit by falling 12.5%.
The recent nosedive in US equities is actually the result of the market finally performing its intended function by assessing and pricing in the risk that the US will curb social mobility in the same way as China and most of Europe. This in turn puts additional pressure onto industries such as hospitality, tourism, travel, aviation, energy and even banks. We expect this to curb economic growth sharply throughout 2020 and even into 2021, significantly increasing the risk for a global recession.
WHERE TO FROM HERE?
We can be reasonably certain that we’ll have more volatility as the bliss of the 11-year bull-run gets eradicated. The good news is that the market-valuation-machine is functioning again. As far as COVID-19 is concerned, we believe it will still get worse before it improves. Infection forecasts suggest that it will be between 10 and 14 weeks before we see peak infection, which would take us to mid-year.
In addition, South Africa still needs to face the possibility of the Moody’s downgrade guillotine in just two weeks’ time, on 27 March 2020, so we expect some heighted nervousness in the local markets relative to their global counterparts.
PORTFOLIOS REMAIN IN GOOD HANDS AND ARE POSITIONED FOR TURBULENT TIMES
In turbulent times such as these, the most important thing is not to overreact or allow fear to override your investment strategy. This is when you risk making the wrong decision at the wrong time.
Selling out of equity after a 25% market decline means locking in your losses, and missing out on the potential to participate in any recovery. Additionally, history shows us that markets do recover. In this instance, the timing of a turnaround is a matter of waiting for the Coronavirus to stabilise. This will happen. After which we expect markets to rebound.
Careful risk management lies at the heart of our investment philosophy, and situations like these are exactly why we follow a disciplined cash flow process, managing each client’s portfolio and asset mix according to their individual cash flow requirements. As our clients approach and enter their retirement, our advisors work hard to ensure that between two and six years’ living expenses or cash requirements are invested in stable, low-volatility assets, protecting you and your portfolio against exactly these types of events and risks.
Longer-term assets that can remain invested for six or more years, are then invested in more growth-orientated assets such as equities. Consequently protecting the long-term purchasing power of your wealth against inflation.
This strategy means that none of our clients should feel the need to become forced sellers in a poor market. In a significant equity market sell-off, you can rely on the more stable asset classes in your portfolio, which are deliberately increased closer to planned cash flow requirements. Our approach affords you the ability to wait for the growth portion of your investment to recover, and get back into the money, before you need to dip in and top up the stable asset component of your portfolio, thus safeguarding the value of your wealth.
It is important to remember, that even after a long sell-off, the cycle typically turns within a few years. Citadel has been focused on de-risking portfolios for some time. We have increased the stable and prudent portion the portfolio over the past two years, whilst adding alternatives and protected equity to the growth portfolio. This together with positioning the overall portfolio for currency weakness. You can rest assured that your wealth is currently very well-positioned. We have fitted many shock absorbers to ensure protection of your assets for any tough times ahead.
Written by Citadel Asset Management