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Summary
• Global equity markets have registered their most rapid descent into bear territory during March.
• Markets are clearly pricing in a recession, driving governments and central banks to implement unprecedented strategies to bridge the gap until figures from the Covid-19 pandemic starts to stabilise.
• However, the indiscriminate market correction may well present an attractive opportunity for long-term investors to buy quality assets at bargain prices.
• Techniques such as euro cost averaging and value averaging are best applied during periods of market downturn in order to the reap the full benefits of an eventual recovery.
• In these situations, investors are urged not to panic and to stick and to their original investment plan at far as possible, taking advantage of market corrections to average down exposures.
March’s drop in global equity markets has marked the swiftest ever descent into a bear market. In the US, the S&P 500 peaked seven weeks ago, yet the Index has already fallen by 34% from top to bottom so far this year. This contrasts with other major bear markets of the past when in 1929, 1987 and 2008, only a pronounced “crash phase” occurred over several weeks or months after the peak. Moreover, since reaching a bottom on March 23, the Index has retracted 37% of the points lost.
Different stages of the bear market
History shows us that down markets have always rebounded. Just like any other bear market in history, the current one will have a beginning, a middle and ultimately, an end. At the moment, the market is clearly indicating that we are at the start of a recession as evidenced by the publication of the first draft of dismal economic data for March. To combat this scenario, governments and central banks in western countries are implementing ‘whatever it takes’ strategies to prevent an immediate recession turning into an outright depression. However, it is important to stress that their efforts at this stage are directed towards buying some time until the virus starts to subside rather than attempting to spark a sustained economic recovery. Under these circumstances, we are comforted by the words of former Federal Reserve Chairman Ben Bernanke, who in a recent interview described the coronavirus economic halt more like a “major snowstorm or a natural disaster than it is to a classic 1930-style depression.”
At this point, we do not know how long it will take for the world to get Covid-19 under control or how long it will take for economies to recover. What we do know is that for long-term investors, history is showing that the current market situation should present an attractive growth opportunity. This coupled with the fact that companies are racing against time to produce a vaccine in record time, while infection rates are falling in worst-hit countries such as China and Italy, these are all good reasons for being optimistic. Unfortunately, a bottom cannot be called until we are already out of it. But based on the timing of markets’ bottom in past recessions, the low point normally occurs 4-9 months before the end of the recession.
Emotional investing
We acknowledge that it is hard to make rational investment decisions when markets are in turmoil and people around the world are facing the consequences of the coronavirus pandemic in their own lives. However, as was the case during the days following the 9/11 events, we must remain mindful of our long-term financial security. When a bull market ends, people fear that equity prices will never stop falling. While investors cannot control price swings, they can, however, control how they react to them. It is important to keep in mind that in the end, market declines decrease risks and increase the prospect for future returns. It is precisely in these testing times that long-term investors should take advantage of mispriced assets and build portfolios for life.
Timing the markets is extremely difficult and no one knows when the current market downturn is going to bottom out. Indeed, technical indicators seem to suggest that the bounce in the S&P 500 may have stalled upon reaching its first major resistance level. Yet, it is also worth pointing out that, after a period of heightened intraday volatility, daily oscillations have started to narrow and trading volumes on down days and up days, have also started to level off in recent days. Moreover, if markets had to fall even further, they would have already dipped at a lower level. While it may take time for the markets to pick up, if an investor has spare money to invest, they might want to consider starting to phase money in now so that they do not lose out on gains when the markets turn.
The benefits of euro cost averaging
By investing regularly in volatile markets such as on a monthly basis, investors should benefit from the principle of ‘euro cost averaging’. This means making regular incremental investments over a period of time as opposed to a one-off lump sum investment, which is done at regular intervals regardless of the share price at the time of purchase. In today’s markets, this means that if prices fall further (on top of the 25%+ decline to date), an investor would be in a position to buy more shares at a lower price, which affords an element of discipline as an investor will not have to face emotional resistance based on the fear of further short-term losses when investing. Indeed, for this strategy to bear fruit, an investor will almost certainly have to buy on the way down if they want to pick up the full recovery on the way up. This approach has the benefit of being straight forward and requires minimum intervention on the part of the investor other than setting up a monthly direct debit facility from their account.
A slight refinement to this technique is to adjust the amount an investor commits on a regular basis depending on where prices are at a particular point in time. Thus, if markets are down during a particular week or month, then it may be opportune to consider a higher investment amount to take advantage of lower entry prices. The benefit of this technique, commonly known as ‘value averaging’, is that an investor is partly shielded from paying too much when markets may look expensive. Similar to the euro cost averaging, an investor buys more shares when markets fall, but the effect is more pronounced. A major drawback of this approach is that it requires much more monitoring on the part of the investor to decide how much money they will have to invest every month. However, in the current market circumstances, it pays for an investor to be vigilant because they would be able to make good investments at bargain prices.
What to invest in
In effect, euro cost averaging and value averaging techniques work best in volatile assets with an expected high return over the longer term, such as equities or high yielding bonds. As the global pandemic spreads, individual stock picking can be problematic, particularly for the small, unsophisticated investor, as companies are not committing themselves to any tangible expectations for the next few months. This makes the job of discerning a company’s financial wellbeing even more difficult. A more structured approach is to consider diversifying in a range of investment funds. The best example of this is the Managed Fund Portfolio strategies managed by our in-house team of specialised Investment Managers at Calamatta Cuschieri. These consist of three well-diversified portfolios made up of a careful selection of top-tier global funds which are managed together as part of a flexible strategy. Each strategy represents a different risk profile and is adjusted regularly to reflect developing market circumstances. These strategies provide investors with the peace of mind that their investments are being monitored on an ongoing basis and action is taken when necessary and in the best interest of our clients.
An investor may also want to seek advice on our unbiased selection of top-rated global funds which have strong long term growth prospects and may be well-positioned to recover faster when markets pick up. Some examples are the healthcare and technology sectors which are without a doubt, two industries at the forefront of getting us through the current pandemic.
In general, we believe that collective investments currently offer a better option than individual shares. Buying funds or exchange-traded funds are considered to be a better option rather than trying to pick up individual shares which could go either way. However, younger investors with a longer investment time horizon are more likely to have a higher risk tolerance and may specifically look at individual shares as the correction has been indiscriminate and in some cases, discounts are currently at historical highs. Having said that, it is important to keep in mind that discounts may well widen even further so investors should not be buying equities solely based on this factor. At the same time, it is equally true that there are some high-quality, blue-chip companies out there which are now much cheaper than they have been in years. Similarly, areas of the market that have suffered heavy dislocations – such as travel-related companies – may have more scope for growth than other areas when markets recover. For these brave enough investors, our CC Trader platform offers a comprehensive selection of securities at a fraction of the cost that they may be accustomed to.
Investing is fraught with emotion making it difficult to stay disciplined. However, it is important to remember that emotional decisions have often proved to be the wrong decision in hindsight. In adverse market situations, it is therefore important that investors continue to stick to their original plan as far as possible. The most difficult time to invest is when everyone else is panicking but this has generally also been the best time to invest.
This article was issued by Stephen Borg, Head of Wealth and Fund Management at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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