Gulf News - Are there investment lessons to be learned from epidemics/pandemics?

The Coronavirus pandemic has been wreaking havoc in global financial markets while its economic implications are also manifesting in varied forms around the world. Stock markets have taken a pummeling, millions of jobs are at stake, workplaces are shrinking and companies are feeling the pressure on their business operations. Investors, however, are no strangers to dealing with uncertainty as history proves that emergency events typically wipe off huge value from their portfolios.

The recent bout of volatility could especially spook new investors, who have been used to consecutive rounds of market rally in recent times. But wealth managers caution investors not to behave in a herd mentality and sell all their assets in panic, resulting in sharp price falls. Instead of panicking and pausing all investment, savvy investors can consider the discounted prices for good value stocks and start value buying in particular asset classes. Whether the investor is long term or short term is a major factor in the type of assets he chooses.

Don’t sell and miss the market rebound

“At the moment, the majority of investments will be down. Selling is not the right choice for the majority of people. Selling any asset means that it will be converted to cash, taking your money out of the markets. The key thing to remember is that there is a very high likelihood of a market rally and the last thing you will want to do is to miss out on the rebound,” says David Raynor, financial consultant, deVere Acuma.

As US billionaire investor Warren Buffet’s maxim goes: “Be greedy when others are fearful and fearful when they are greedy.” This approach can produce long-term returns for investors.

“Uncertain times throw up opportunities for a disciplined investor. As the tide changes, opportunities will arise for reaping rewards over the long term,” comments M.R. Raghu, managing director, Marmore MENA Intelligence.

Impossible to time the market bottom

One of the key concerns of investors during an epidemic is to decide on when the market bottoms out. Many people try to time the markets, however, they cannot react quickly and tend to miss the bottom of the downturn. However, staying invested helps ensure you catch the upturn in markets when it occurs.

“The current scenario is a case in point with investors on tenterhooks. With global markets currently correcting, time is ripe for investors to start buying good quality beaten down stocks. Should the market start correcting further lower, lower levels can be used to average out stocks and get good buying price. Timing the markets is the key lesson to learn,” says Vijay Valecha, chief investment officer, Century Financial.

Investments are unlikely to stay at these levels for the long term and investors should be having the conversation with their advisor about how to best maximise potential future growth, within their risk appetite and time horizon.

Market upturn after earlier epidemics

Looking back at other major epidemics like SARS in 2003, swine flu in 2009 and Ebola in 2014, while the markets reflected the panic at the time of their outbreaks, the industry always recovered. Other notable events that impacted both global and local economies were the Wall Street crash (1929), Black Monday (1987), Black Wednesday (1992), Dot-Com Bubble (2000) and the global financial crisis in 2008.

Events that hit global economies

On looking back at these previous events, one can see that there has always been a recovery and a new market high. While it can be difficult to see this during the market corrections, investors must remain logical and realistic. They must avoid being caught up in the hype and remember why they made their investments in the first place.

“It’s only human to feel uneasy during times like these. People are worried about their health and finances. However, we need to be able to focus on the things we can control. We cannot control what happens in the markets, so there’s no point worrying about that. If investors have a financial adviser they trust, they should be comfortable knowing their portfolios are set up to work for them – during good and bad times. This alleviates any unnecessary panic about their finances,” observes Stuart Ritchie, director of wealth advice at Dubai financial advisory firm AES International.

Investors must understand that this is a fantastic opportunity to buy into the market. Equities are more affordable than ever and will bring great value when the markets recover. When investing for the long term, short-term fluctuations like these will have little to no impact on investor returns in the future.

“All an investor can do now is wait and look for new opportunities. This isn’t the first time that the markets have changed and it won’t be the last,” reminds Raynor.

Safe haven demand

As investors exit risky investments in times of emergency, safe haven instruments like gold and US Treasuries are usually favoured. During the past SARS outbreak, gold prices rallied by 40 per cent. However, gold prices have been under considerable pressure in the coronavirus outbreak.

“During times of epidemic, investors tend to sell everything starting from riskier assets like indices and high yield debt instruments to even good quality fundamental stocks. Currently, the market has not even spared traditional safe havens like gold and bonds. Investors prefer to sit on the sidelines and deploy majority of their investments and savings to cash,” reckons Valecha.

Investors must always take care to diversify their portfolio across different asset classes. The best way to achieve this is to avoid ‘putting all your eggs in one basket’. You should diversify across asset classes, geographies and sectors.

During uncertain times, one asset class will ultimately outperform another. “For instance, during the COVID-19 outbreak, we’ve seen equity markets tumble and bonds outperform as more funds were flowing into perceived ‘safe haven’ assets. Investors with diversified portfolios are already prepared for fluctuations in the markets. They’re set up to weather any storm with a mix of equities to drive returns when markets are good and bonds to minimise risk when markets fall,” cautions Ritchie.

If you don’t have a diversified core portfolio as yet, now is a good time to build one using exchange-traded funds, suggest wealth advisors.

Taking stock of finances

It’s during times like these that people discover how financially secure they really are. Besides rebalancing your budget to live frugally, investors can also consider changing their fund manager if they aren’t willing to alter their style of working to suit investment needs.

“Sort out your succession planning immediately – create trusts, wills, nominations and find that trusted individual who you can hand things over to if you’re quarantined, under lockdown or unable to function - professionally and personally. Also, have a conversation with near and dear ones regarding finances,” suggests Anita Yadav, partner, Aspire Capital.

Asset classes to consider

With major equity indices across the world down by 25 percent to 40 percent from the highs and crude down by almost 70 percent from its peak, there is lot of value in many assets.

“For people in the younger age bracket or for those with surplus assets, stocks are always a good investment choice. On the other hand, investors who have capital preservation as the main objective should go fixed income. For investors with surplus capital, a 70/30 ratio of risk assets/bonds is recommended and for people who have capital preservation as the objective, a 30/70 in favour of bonds will be the right choice. Investors with a moderate risk appetite are recommended to give a 50/50 allocation between risk assets and bonds. Risk assets can include equities, commodities and bonds of Emerging Market nations,” suggests Valecha.

For bonds, the investors should look for good credit rating. A good portfolio should be properly diversified between equities, bonds and commodities. Equities have outperformed fixed income over the long term. When consumer confidence and spending picks up, equities generally perform well in the short-term as a result.

“It’s often overlooked, but investing in a well-diversified equity [or bond] portfolio will automatically give you exposure to other asset classes such as property and commodities, with some of the underlying holdings being property development and/or construction firms as well as mining companies. There’s no need to take this further and speculate on commodity prices [for example] by holding physical commodities or commodity ETFs,” adds Ritchie.

Sectors to choose and avoid

The current pandemic could lead to bankruptcies in many sectors. Investors are therefore advised to avoid companies from travel, restaurants, entertainment, and brick and mortar retail stores.

“A tactical investor can initiate a position in agricultural commodities like wheat and soybeans since the consumer staple demand is expected to grow during this epidemic. More people staying at home leads to higher consumption of basic food items while supply chain disruption along with lack of adequate hands for harvest could result in lower production. Another commodity worth considering is gold. The pumping of abundant liquidity into the system by world’s Central Banks should support demand for the yellow metal. For the long term, stocks are always an interesting asset class,” adds Valecha.

Invest in developed or emerging markets?

With emerging markets no more offering fast growth and high returns unlike in the past, many investors are raising questions over the role of EMs in a diversified portfolio.

“It’s the quality of the asset that matters. In fact, there are a lot of global companies whose operations straddle developed as well as frontier/emerging markets. Investors should also use the current market turmoil to move away from inferior assets to companies with superior fundamentals in secular growth sectors like ecommerce, cloud computing and digital payments. Some of the blue chips in this space are Microsoft, Alphabet [parent of Google], Visa, Amazon, Mastercard, etc.,” explains Valecha.

It’s not advisable for investors to overweigh themselves in either developed or emerging markets as this will result in a drag in performance, should the market that you bet on, underperform the other. “Investors should instead take a market capitalisation approach to expose themselves according to the current weighting [as a percentage of the world] of developed and emerging markets,” suggests Ritchie.