These are turbulent times. As markets continue to experience sharp falls, James and Pacome from Nutmeg’s investment team assess the global outlook and explain how central banks and governments are approaching the economic fallout from the Covid-19 pandemic.
This has been a very eventful month. Can you give us a sense of the scale of what’s happened?
Pacome: What we have experienced this month, in terms of the pandemic and the market volatility, has been almost without precedent. In the market, we’ve experienced the fastest bear market in history (20% from the peak). To bring this into context, it took 21 days, between the market peak in February and where we are now, to lose 20% on the S&P 500. The second fastest one in history was as far back as 1929, with 42 days, and in the 2007 to 2008 period, it took 274 days.
So the speed and magnitude of those losses have never occurred in the past. If we look broadly, most asset classes have been severely impacted, and have seen an increased level of volatility. However, there were some safe havens – bonds, in particular, and the US dollar, which helped as well in the market and in our portfolio. Interestingly, gold, which is often seen by investors as a relatively safe haven, lost money during the period, as it was sold by investors in search of liquidity.
So all in all, what was basically a period of global growth, and positive corporate earnings, and positivity for risky assets, has been severely disrupted by the virus, and investors are trying to see how to price those assets in the context of this virus, and global shutdown among western economies in Europe and in the US.
How long do you think this market volatility will last?
James: It’s really difficult actually to gauge how long periods of market volatility last. Sometimes we have periods of volatility that are really short and sharp in markets, and other times we experience periods that are more protracted, and that last for weeks or for months.
It’s a little bit like if you take a flight and you experience turbulence. It’s part of the journey, but sometimes you experience much more severe turbulence, that lasts for a longer period. And often you can fly without experiencing any turbulence at all.
When it comes to the current bout of market volatility, it’s come in waves. As coronavirus has spread outside of Asia and into more western economies, we’ve seen waves of volatility infiltrate markets. Periods of relative calm, and then periods of quite severe moves in markets. When we think about volatility, and what happens from here, really it’s a case of the unknown. The quicker that economies can see the light at the end of the tunnel the better. The quicker that countries can start to contain and control some of the fallouts from the virus in terms of the medical aspects of what’s happening, the sooner that businesses will have some certainty around the operating environment, and the sooner that investors will become comfortable with what the new reality looks like, etc.
Volatility to some extent is an expression of fear and unknown in markets, it’s an expression of relative panic. And that will tend to settle down and come to fruition as investors begin to understand what the new normal looks like, and what the economic backdrop will look like in western markets, in the months to come for the rest of 2020.
Is there any good news for investors?
Pacome: What I’ve described earlier is really the negative side of the picture. And there clearly is some positive news and information. Firstly, the actions of central banks will have an enormous impact on the market and the economy, when the health issue is going to be contained.
The Fed and the Bank of England have reduced rates quite aggressively, and the Fed have pledged a flow of liquidity, along with the European Central Bank, and the Bank of Japan. So, while governments have provided a so–far relatively muted fiscal policy response, we begin to see with Germany, China last month, and France, the start of a fiscal response. We are still waiting for the US to provide a strong stimulus. But we are confident it’s going to come pretty rapidly. So what we are seeing is the market forcing the hand of central banks and governments to act quickly.
While in the short-term it is very painful, and the market is unfortunately totally focused on the impact of the virus, soon the virus will be contained, and the economic impact of those strong measures will help the economy to recover, and lead to a positive reprice of risky assets.
In light of the situation, is now a good time for me, as an investor, to think about changing my risk level?
James: Well that’s a good question, and it’s one we get a lot actually when markets are volatile, and the simple answer is no, you shouldn’t, unless of course your time frame or your investment goals have changed.
For our fully managed portfolios, and our socially responsibly portfolios, our investment team always reflect current economic, macroeconomic and markets views into those portfolios. We’ve already reduced risk in our fully managed portfolios and socially responsible portfolios. We currently have less risky assets in those portfolios than we would typically do over the long term. In effect, that lower risk approach has already been reflected in those portfolios.
When it comes to our fixed allocation portfolios, those portfolios are built with a long-term strategic bias, and those portfolios will manage risk through automatically rebalancing periods when there’s significant market volatility. The key is to not allow your emotions to allow you to de-risk your portfolio – to remain disciplined, and to remain focused on your long-term investment goals.
That can be really difficult when markets are volatile. But it’s also important to bear in mind that, when we see this type of volatility, the cost of transacting in portfolios also goes up. So this is about making sure that not only are you invested for the long term, that you’re invested and able to be invested for the market rebound, but also that you’re not experiencing undue cost in the portfolio by making changes and trying to time the market, which we know is exceptionally difficult.
About this update: This update was filmed on 17th March 2020.
Data sources: Bloomberg and Macrobond.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past and future performance indicators are not a reliable indicator of future performance.