Uncertain times

With equity markets continuing to fall dramatically since our last note, it is understandable that investors are very apprehensive and concerned right now.

Of course this is about much more than equity markets and the news coming from Italy in particular is heart-breaking.

It is, obviously, not our role to suggest what actions should be taken to stem the outbreak but it is clear that we should follow the advice of experts.

Indeed, I am writing this note from home, having returned from Lanzarote late last night, and on advice will be staying in doors with my family for the next two weeks.

In the short term, it is clear that the headlines are going to get worse. Whilst the news from South Korea and China is encouraging, testing has only really started in the west and we should expect the number of cases to increase dramatically. This is a remarkably challenging time for the world and the outcome is already tragic.

If we turn back to markets, what should investors do at a time like this?

Well for a start we can learn from history. Many (many!) years ago I did my master’s thesis on the impact of catastrophic events on financial markets and, whilst I didn’t study the impact of a pandemic, the conclusions were clear.

Initially catastrophic events create uncertainty, which results in a higher required risk premium, i.e. equities go down as investors demand higher potential returns to compensate for the uncertainty.

Of course, ultimately, global markets recovered from these events (ranging from the Cuban missile crisis to September 11), as we can see from any long term chart.

However, what is interesting was the length of time it took for recovery. I found that the more efficient the market and the quicker the policy response, the quicker the recovery.

This is hardly surprising but it is important because right now we are seeing an incredible policy response to this crisis. Whilst the policy announcements are ongoing, we are seeing global monetary and fiscal stimulus.

In the short term a recession now seems inevitable and certain sectors, such as retail and leisure travel will suffer terribly. However, it is important to note that the world economy was in a reasonable spot before this crisis struck, with a strong consumer economy and recovering business confidence.

We, therefore, believe we will likely see a very sharp recovery, perhaps later this year, as the world economy responds to stimulus.

In light of this, it will be no surprise to regular readers that our advice is to stick to your investment plan, provided that it is the right one for you.

With the world equity market down c.30% from the very recent high, it is evident that there is a high level of panic in financial markets right now.

Perhaps we have reached a low for this market decline or perhaps we haven’t. Unfortunately, we can’t know.

However, we don’t believe future growth will be impaired by this crisis and with potential returns increasing from equity assets, following the decline, we remain very comfortable with our preferred assets.

As ever, please do not hesitate to contact us if you have any questions or would like to chat about recent market events.

Ian Quigley
T: +353 1 421 0300
E: ian.quigley@brewindolphin.ie

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