Coronavirus or Covid-19 Investment update 25 March 2020

Coronavirus or Covid-19: It’s not (yet) over.

The wave of the coronavirus pandemic has left China and is now over Europe and heading for the US.

There are many influences for investors to be aware of.  Firstly the panic selling of anything that could be sold and this at virtually any price. Then there is the current oil price war between Saudi Arabia leading the OPEC countries and Russia. Finally we have the virus itself which is causing fear and consternation among the public and governments in every country in its path.
At long last, the developed worlds’ central banks and governments have reached agreement on the fiscal support mechanisms necessary to keep the world afloat and alive, if not actually vibrant. The last government to sign up to a package of sensible support measures was the United States. Even when the need for action was clear, there was an attempt to support politically friendly large companies and underplay the support for the poorer communities. This took a day or so to clear, but now the coast is clear for a major support package from Washington.

Many investors were forced to sell their holdings including gold, at the lowest prices because they had to meet their obligations. Many ETFs and automated trading systems, especially those with leveraged strategies have major losses which will still be announced. The extreme movements have also shown which fund managers have performed well in adverse circumstances and which stuttered and perhaps failed. This term is called ‘downside capture’ and recognizes the relative performance of a manager in falling markets. I will be adjusting my clients’ portfolios to reflect the lessons learned from this crisis.

The investment markets, especially the stock exchanges began their rebound in the expectation of such coordinated action, but the recovery is still weak and could be fragile. There is however still no roadmap except perhaps for the very long term. It is clear however that many institutional investors and funds must rebalance their portfolios at the end of the month and quarter and will be buying the equities of many different sectors.

The equity markets in Germany suffered surprisingly badly in the past month (yes, it was really just a month), this despite the fact that Germany has so many excellent engineering and electronics companies. Pertly this reflects the fact that the DAX 30 index only has 30 major companies in it. Partly also that short-term traders could not escape their trades in Equities and Indices quickly enough. When an on-line trading platform collapsed under the deluge of sell orders, many short-term investors had to accept major losses.

The future recovery will not show a friendly straight line. The first day of positive results on Tuesday 24th March reflected pent-up frustration that the investment markets had fallen too far. There will be setbacks on the journey to recovery and it is clear that there will be a short global recession based on the closing of many businesses during the battle against the virus.

It is interesting to note that the central bank measure have all but abolished interest rates potentially for a longer time. This will prove to be an aid for weaker economies and companies, but there will still be a number of bankruptcies as customers stay away and there are no reserves to cushion the blow.

The German economy will recover relatively quickly especially once their workforces return to productive work and their customers start buying again. Germany also had a disciplined budget which allowed swift financial support for the stuttering economy.

Italy by contrast has no reserves and no disciplined fiscal policies and has called for a major support package from the European community.

The United States of America built up no fiscal discipline and spent and borrowed very heavily during the rich years. The present fiscal measures going through congress and the senate will heavily increase the level of governmental debt. While this is the wrong time to explore fiscal conservatism, it will fall to the US treasury and the government as a whole to rein back excess spending when the crisis is past.

Economic recovery will depend upon heavy investment which will undoubtedly be rewarded when more stable markets have returned.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung.

He is a Fellow of the Chartered Institute for Securities and Investment in London.


Past performance is no guarantee for future profitability

Coronavirus COVID-19 Don’t Panic

John Townsend‘s Investment Opinions 25 February 2020

Coronavirus or Covid-19: don’t Panic!

A seemingly new virus has emerged in the Chinese city of Wuhan in Hubei province and has then spread to parts of the rest of China and, via the travelling public, to elsewhere in South East Asia and in a small part, on to the rest of the world. The World Health Organisation has expressed concern over the spread of the virus to Iran, Italy and most recently France, Germany and Tenerife.

The social networks abound with rumours and ‘Fake News’ panic reports and have therefore by extension caused the ‘16 year old’ traders in the financial markets to immediately press every alarm button they can find and have instigated panic sales of equities. The WHO suggests that not only is the world facing an epidemic but also an alarming ‘infodemic’.

The reality is that some suppliers of components in China have temporarily shut down to prevent the virus from affecting their staff, and therefore some global manufactures, especially those which have ‘just in time’ policies and carry no or few component stocks have been affected by missing parts. These manufacturers can be in the automotive sector or electronics. Indeed any area where parts or goods can be made more cheaply in China than elsewhere is affected. The Chinese government has also shut down factories that produce medicines and similar products such as analgesics, which were made cheaply there. The shortage of these products will be felt around much of the rest of the world. Airlines and tourist resorts have also suffered as people as a whole try not to venture to areas which might be affected.

The fall in equity market prices especially in the Hong Kong market, which is one tenth of the size of the Shanghai / Shenzhen markets is a temporary phenomenon and as with similar crises such as SARS in the past, will soon be over. For those investors who like to take less conservative risks, this is probably a good time to invest anew in Asian – including Chinese – equities.

For those with a more sober approach to life, a longer term view of their investments and a memory of past crises, what we are seeing now is another typical overreaction in the equity trading markets, which will be multiplied by the effects that falling indices will have on the ETF investments. Good active managers will have diversified their portfolios so as not to be vulnerable to shocks in any small groups of sectors. Some, especially those specialized in the Hong Kong equity markets will see greater movement, but even this will be short-lived.

The main message is to hold one’s nerve and not to sell into a temporary fall. My clients with balanced portfolios will still have a growth in their portfolios of around 2% since the beginning of 2020, even after the panic fall in the markets. This is less than before the crisis emerged but the year is still less than 2 months old and there will be plenty of time to make additional gains when the panic eases.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung.

He is a Fellow of the Chartered Institute for Securities and Investment in London.


Past performance is no guarantee for future profitability