It’s been a heck of a start to 2020 – between a great start to the year (at least in the investment markets) and increasing media attention on the coronavirus outbreaks around the world, our section on ‘rolling crises’ from our last email seems more applicable then ever.
- As always regular monthly market update will touch on:
- How are global markets doing?
- How are managers reacting to global events?
- What should you be doing?
How are global markets doing?
If we had written this newsletter a week ago, the answer would have been ‘fantastic’! However, amidst increasing attention to and spread of the COVID-19 coronavirus throughout first Asia and now into Europe and much of the world, markets have experienced a sharp sell-off in the past few days. Is this a cause for undue concern? We’ve done a great deal of research in order to keep our thumbs on the pulse of what managers are thinking.
Many parallels have been drawn between this outbreak and the one we saw in 2003 with SARS (another coronavirus, although significantly more deadly). As with that outbreak, we saw it originate in China and spread relatively rapidly and resulted in a market decline in mid-2002 followed by a hard ‘V’ type rebound in April 2003 (returning to previous values over the course of a couple months). While many luminaries caution that the situation is likely to evolve differently now compared to 17 years ago, we’re seeing a cautious and guarded optimism flavor most commentary. Coronavirus, in a nutshell, is a ‘wildcard’ that will primarily amplify the volatility markets have been experiencing for the past few years.
Outside of the coronavirus, little remains changed from the situation we saw in much of 2019. While the global rate of growth continues to slow, it hasn’t stopped or reversed. Many experts, even those focused on areas heavily impacted by the coronavirus, are still openly if cautiously optimistic of economic prospects in global markets. Firms such as UBS (with a strong Asian presence) have projected that leading indicators, those economic metrics that tend to ‘predict’ future economic activity, are trending towards a relatively strong year. This is a positive outlook, given how successfully many markets and managers navigated a strong 2019 to recapture and exceed most of the losses seen at the end of 2018.
The long and short of it is this: the coronavirus is a strong ‘boogey man’ sort of event. It’s a single news item that compounds fears people already feel about their investments with fears about their health – a scary time to be glued to the news streams. This type of event can have strong impacts on sentiment, particularly for DIY types who respond to every headline with a transaction. However, when one digs a bit deeper and references expert sources such as the WHO, it’s easier to remain optimistic that the situation will be brought under control and the world economy will continue to chug along with markets eventually recovering from the short-term shock.
How are managers reacting to global events?
This is a tough question, since many of the managers we trust the most (whether they’re a household name or not) are the sort that quietly and calmly navigate their funds through short-term global events by relying on careful analysis and by separating emotion from their decision-making processes. While it’s easy to find managers who love to create fear in the markets by posting fear-mongering dispatches in all caps, it’s trickier to get an emotional response out of the real pros who have been through this all before.
As a general rule, we prefer managers who either engage in broad diversification using ETF portfolios (building extremely well diversified portfolios that are not over-exposed to any one country, industry or sector, all at a relatively low cost) or those using a bottom-up strategy for evaluating the companies they own. Managers such as Forstrong Global Asset Management (an ETF manager), Fidelity’s Mark Schmehl and Manulife’s Terry Carr all share a common philosophy – you cannot succeed by managing for the short-term. It’s impossible to time the market consistently (although even the worst gambler strikes it lucky every now and then); it’s far more profitable to do your research, own a well diversified portfolio of heavily researched companies or markets and let that dispassionate math do its work over an appropriate length of time.
We could list examples of poor market timing that was a ‘sure thing’ at the time until the cows come home, but the simplest summary of manager behavior is this: if a company had strong enough prospects to buy last Monday on the thesis that it would double in value over 5 years, what does it matter if it slips a bit in value a week into your 5 year thesis? In fact, if you thought it was worth buying that company at a higher price last week, wouldn’t you now take the opportunity to load up on even more of that company now that it’s cheaper still?
This is the same approach we always recommend our clients take with their investments and their investment horizons.
What should I be doing?
The short answer is this: the same thing you’ve been doing. If you’re in a growth phase of your investment plan, then a 8+ year time horizon means you don’t really care about the short-term fluctuations so long as the long-term results are positive. If you’re in an income phase of your investment plan, we make sure that you’re not overly exposed to the sort of risk that dominates the news. It’s great to watch BNN and see that the S&P500 (a measure of the 500 biggest companies in the USA) is up or down 5% today, but we don’t have a single client we work with that has 100% of all their assets in that market, so it’s all just more ‘noise’.
If you’re saving, keep saving. If you’re drawing an income, rest assured that the source of that income is already having risk managed professionally. And, most importantly, if you’re truly concerned, please reach out to us. We are always more than happy to discuss your accounts and your plan to give you context on how your investments are set up to navigate short-term volatility.
