As the novel coronavirus continues to spread unabated, global and local equity markets have sold off aggressively from the highs recorded on 19 February this year. Global equities are now trading 18% off their highs. South African equities haven’t been able to escape the panic selling and are now trading 21% lower in dollar terms. What we’re seeing is behaviour typically associated with a bear market.
This ‘bear market’ behaviour has also spilled over to other financial markets. The decline in the oil price has led to Saudi Arabia ‘breaking ranks’ in OPEC – the country has indicated it will turn open the proverbial taps and offer additional crude for the foreseeable future, essentially flooding the market. In response, US treasuries have firmed from already high prices – yields on 10-year treasury bonds have strengthened from 1.6% late in February to 0.5% currently.
Investors are obviously deeply troubled by these events. At Sanlam Private Wealth, we craft portfolios that deliver inflation-beating returns – we therefore strongly believe that a clear perspective on macro events like the coronavirus, combined with consideration for the valuation of financial assets, should continue to drive our investment strategy, even during the most uncertain times.
Our perspective on the global sell-off
We’ve said for some time now that globally, we’re in an advanced stage of the economic upcycle and the equity bull market – over the past decade, global equities have gained more than 10% per annum. We’ve also cautioned that valuations are elevated, which is generally associated with higher risk. It’s important to note, however, that – unlike previous mature bull markets – equity prices on average are not in bubble territory.
Towards the end of a cycle, assets do become more vulnerable. We’re therefore currently marginally underweight in equities in our multi-asset class portfolios, and we have a 20% cash exposure in the Sanlam Global High Quality Equity Fund. This hasn’t until now been the most popular of approaches, especially not in the bull market of 2019.
Enter the coronavirus…
A macro ‘event’ like the coronavirus is what’s known as an external shock in financial markets. And it’s not unusual for such a shock (another example is higher oil prices) to bring a bull market to an end. So what we’ve seen is stocks that are more sensitive to economic cycles, coming under severe selling pressure as the external shock triggers bear market behaviour. There’s of course no rationality associated with current investor behaviour – people are selling because they’re fearful.
It’s very different to the GFC
It’s crucial to realise that what we’re currently witnessing in global markets is NOT the same as the 2007/2008 global financial crisis (GFC), which was triggered by a banking crisis which shook the very foundation of the global financial system and presented enormous challenges to economic policymakers. In short, many argued ‘the system’ was broken.
This time around, although we’re experiencing a severe external shock, the financial system is not under threat. It does, however, have cyclical economic consequences – global economic activity is likely to come under severe pressure in Q1 and Q2 of 2020. The world may even go into recession, and negative investor sentiment is likely to prevail.
However, once the recovery kicks in, which it always does, it will be business as usual. If the recovery is for whatever reason more pronounced than it was after previous similar shocks, risky asset prices are likely to recover even sooner.
Impact on investments
First, it’s too late to panic – the sell-off has simply been too severe. In our view, now is not the time to reduce risk in our clients’ portfolios, no matter how scary the markets appear. The proverbial horse has already bolted – to sell off equities out of fear in the current climate could prove disastrous. Many shares are trading well below their true value (intrinsic value) and it just wouldn’t make sense to sell these assets at material discounts.
Second, there is no need to rush into bargain hunting mode because prices are falling. The news flow is likely to continue to dictate investor sentiment over the short term, and we should expect volatility for the foreseeable future. We do believe, however, that it’s time to put on our buying caps. At Sanlam Private Wealth, we will – in our usual considered way – look into acquiring shares that have been sold off for the wrong reasons.
