Update

I’d like to keep you updated with the latest Covid-19 situation. First & foremost, the pandemic is a humanitarian global crisis and this we take seriously. To date, global cases have exceeded 470,000 with over 21,000 deaths, however, the good news is over 110,000 people have also recovered. We expect cases to grow in April as an increasing number of countries around the world introduce curfews, restrictions, and in some cases total police-enforced lockdown of activity.

Nonetheless, we see the reason for optimism and glimmers of light at the end of the tunnel. Hubei province in China, where the coronavirus pandemic originated, lifted almost all lockdown measures this week, after reporting only one new infection in the last week. Italy has seen consecutive declines in the numbers of new cases over the last couple of days. Despite two waves of outbreaks, South Korea has essentially ‘flattened the curve’. Lockdown, social distancing and mass-testing have proven to be effective in containing the spread of this virus. Additionally, there may be some positive developments on the medication front to treat this virus; this would ease pressure on hospital resources and ICUs.

Amidst this risk and essentially a global economic shutdown, governments are making substantial measures to backstop the financial liquidity difficulties faced by multinational companies, SME’s and individuals. In the U.S. the Trump administration is seeking to pass a stimulus package of near $2 trillion, still being negotiated in the Senate. For context as to the magnitude of the stimulus, this is nearly 3 times the initial authorized amount and more than 5 times the disbursed amount by the U.S. Treasury during the global financial crisis of 2008-2009. The Federal Reserve has essentially announced ‘unlimited quantitative easing’.

The European Central Bank has announced US$820 billion in government and private sector bond purchases until the end of the year. A global recession seems likely given the slowdown, the only question is how severe. The conditions for the eventual inevitable recovery are, however, being put in place.

We must be clear that volatility is not risk. Risk is the chance of capital loss whereas volatility equates to the fluctuations of an asset class during the holding period. Risk assets such as publicly-traded equities tend to be very volatile. Equity markets are forward-looking and dislike events that cause uncertainty in the short-term. This uncertainty causes volatility as investors attempt to price in the various scenarios as they are playing out.

Despite the reasonably high level of sophistication and efficiency in these capital markets, human nature has not changed. Investors tend to underreact to medium to high probability events and overreact to low probability events. Few, if any, could have foreseen that we would be at this global economic and financial juncture caused by a coronavirus flu strain coming from a province in China. With all this uncertainty there is certainly the possibility that markets have overreacted to the downside and may continue to do so.

History has proven that getting emotional and selling is the wrong thing to do during market downturns. Investors tend to have loss aversion meaning that the pain of a loss is felt more acutely than the good feeling of a gain. This is why many investors sell. The largest 1-day increases have happened during bear markets and trying to time the market is a risky endeavour. There is a significant opportunity cost to being out of the market during these few large up-days and this has a negative impact on long-term returns.

The longer the time horizon of investment, the less impact that this crisis will have. Prudence is still required at this stage; we are staying the course for our clients in globally diversified equity and fixed-income portfolios. We are focused on ensuring that individual portfolios are positioned optimally according to the client’s risk preferences and in the client’s best interests long-term.

Mark Donnelly