You should already know what's going on with COVID-19 - and if you don't - get out from under that rock! Or actually, just stay there and check the internet news instead. Today, we'll assume you're up to date with the latest update on cases and outbreak news which most of you have probably already read about, and we'll dive straight into financial markets.
So what's the latest?
Well since global financial markets took a nosedive exactly 1 month ago, here's where all the stock indices are:
- US / S&P500: -30%
- EU / EuroSTOXX50: -33%
- UK / FTSE100: -30%
- HK / HANGSENG: -18%
- Japan / NIKKEI: -30%
- Australia / ASX200: -33%
For context, the global financial crisis saw a roughly -40% stock market move from top to bottom. We're not there yet, but we seem to be getting there pretty quickly.
It's fairly clear that global stock markets will soon need the various fiscal and monetary policy shaped ventilators which have been prepared by central banks and governments across the world, metaphorically speaking.
This move in stock markets has been accompanied by historically high levels of market volatility across stocks, bonds, commodities and foreign exchange markets.
Why is this happening?!
As you know, the global economy has been very severely disrupted in recent weeks in order to aid the fight against the spread of coronavirus. If it was a car, this would be equivalent to hitting the emergency brakes in order to avoid a fatal crash. Different countries are at different stages of hitting the brakes, with Western economies slightly behind the curve relative to their Asian counterparts.
From a financial market perspective, the sell-off and spike in volatility have primarily been driven by uncertainty and the fear which comes with a potentially disastrous next few months ahead for the global economy.
The global response
As we covered last time, this is a case of the real world economy having negative consequences on the financial economy (the opposite of what happened in the global financial crisis in 2008-09). As such, we needed governments to really take control by introducing strong measures to both combat the spread of the virus on the ground, as well as supporting the loss of economic output that inevitably occurs when you slam the emergency brakes on the global economy.
In other words, fiscal policy had to drive the response here, to be supplemented as best as possible by monetary policy.
And the good news is we've had exactly that from most major economies across the world, with politicians from all sides working together as well as with their central banking counterparts to soften the economic blow as much as possible.
But what does all this ACTUALLY mean from an investment perspective?
For better or worse, this question seems to be near the top of people's minds at the moment. So without going into specific stocks, we'll provide an overview of how we are thinking about the situation at hand and how we might approach it if we were investing.
Let's start by thinking through what is likely to happen in the near future.
Given the near-total shutdown of certain areas of the economy - think airlines / travel, leisure, hospitality and consumer discretionary companies - it's likely the first companies we'll see really struggling financially coming from these sectors. And these are among the hardest hit stock prices across the market.
When we say "struggling financially", this means companies experiencing liquidity issues - i.e. do they have enough cash and other liquid resources available to keep making the interest and debt repayments they owe, the rent on their buildings, leases on their machinery and/or wages they owe their workers? The answer to this question really depends on how exactly the future unfolds - and that future is highly uncertain right now. Some companies may be fine for 3 months, but struggle thereafter. While others may be fine for longer but then start to struggle. It's worth being extra careful with companies which may struggle with debt repayments - that liquidity issue could also spiral into a balance sheet issue / credit crisis.
It's this uncertainty about the future which is really taking a toll on stock markets and financial markets more generally. And in these uncertain conditions, it's wise to tread carefully.
So how should I think about my investment decisions?
As mentioned, we would approach this situation with a degree of caution - try catching too many falling knives and it's likely you'll get cut.
A good starting point could be to find high quality companies / brands which you are familiar with and think could potentially be good investments. You could then work through our stock analysis framework to ensure you're covering your bases, paying special attention to the "Capital Markets" and "Broader Financial Market Context" buckets.
If your chosen stocks all make sense in the context of the framework, the next step would be to think through your particular financial situation - are you investing money you don't need for a while? Are you happy to ride out any potential short term losses in order to achieve long term returns?
If you are, it then makes sense to think about your current levels of investment - are you quite invested in stock markets already, or do you have cash that you'd like to invest? Once you've thought through this, you should have a better sense for your own ability and willingness to take risk. So let's take a look at your options - or the types of risk you might want to take on right now - because in addition to the single stock investments you could make, you also likely have access to investing in funds / ETFs with a diversified selection of stocks.
In times of uncertainty, it makes even more sense than usual to limit the risk you take on any one individual company.
For most people, this means having the majority of your money invested in funds / ETFs given they limit your exposure to any individual company which may end up struggling in future.
Moments like these provide opportunities to invest in global themes which you think will do well in future, depending on your expected investment horizon. There are many funds out there, but as an example, Blackrock's iShares Thematic Funds have some excellent options. Blackrock, Vanguard and many other fund managers also have plenty of low cost ETFs if you prefer to invest in specific stock market indices or other asset classes.
So you've picked out the stocks and/or funds you want to put your money into. That's great, but wait a minute. Do you really want to invest all your money at once in these volatile markets?
We think it makes more sense to average in. Given the nature of this market move, the very real world problems driving it, and the fragile investor sentiment, we think this will likely be a protracted road to recovery - stock prices won't jump back to where they were last month in a hurry. If anything, they might linger at these levels for a while or even drop further.
This means you'll have plenty of opportunities in the coming weeks and months to add to your initial investments, so it likely makes more sense to keep an eye on the prices of assets you are looking to invest in on a regular basis and look for entry points when you can keep your cost of investing relatively low - there's no rush and certainly no need to chase investments right now - take your time with it and take baby steps with the amounts you are comfortable investing.
A final note
We can probably all agree these are historic times we're living in, and while the short-to-medium term future remains highly uncertain, we hope you have been able to keep your spirits up while away from society. Whether thats by seeing people come together on social media, streaming unprecedented amounts of content online or finally making your way through that reading list - we hope you look out for yourself and your loved ones during this time.
And for the sake of all those who are vulnerable in our societies, please practice social distancing and avoid stockpiling food and toilet paper. There will be enough to go around.