The U.S. Federal Reserve has slashed interest rates to zero and many other central banks are following suit, outside of their normal schedule of meetings. The Reserve Bank of Australia is likely to follow suit in the days ahead.
Global regulatory authorities have started to unleash massive stimulus packages, which will no doubt be the start of a continued program of stimulation to support individuals, business, markets and general economic activity over the coming months.
If investors are able to look through the immediate short sharp drop in earnings and likely global technical recession (two quarters of negative growth), valuations (the guiding principle) look very attractive from a medium-term standpoint.
Notwithstanding the seriousness of the coronavirus, pandemics are temporary shocks. There will be harsh economic consequences, but the worst will pass with the virus. Flights will be rebooked, restaurants refilled, and staff rehired.
Pandemic scares are not uncommon – it’s very rare they turn into an international emergency of this scale, and uncertainty is the worst news. Markets do rebound out of these scary times. The chart below of previous major outbreaks from SARS to Ebola, MERS, and others, shows us that the share market inevitably bounces back. Often, there are other factors in play which drive markets at the same time as these historical outbreaks, but the point is that such epidemics do become history and the world moves ahead.
Given the current circumstances, it is often good to reflect on some words that have been framed out of history. With equity markets down significantly over the past few weeks, and media focus often compounding negative feelings, some investors may feel anxious.
A great line in the movie ‘Bridge of Spies’. Tom Hanks plays a US lawyer involved in a prisoner swap with the Russians. To one of the prisoners going back to Mother Russia, Hanks asked if he was worried that he might be seen as a traitor rather than a hero. The prisoner comes back with a great reply: “Would it help?”
Being concerned about negativity in asset prices is understandable, but it doesn’t help. What we are seeing is negativity based on uncertainty. This is uncertainty around the degree of the short term (several quarters) impact on economic growth and share price falls. New valuations are hard to justify if one refocuses on long term (5 year) economic factors and long-term company earnings.
Provided you’re not a seller, movements in asset values are only on paper. Quality companies will recover, dividends will flow and share prices should recover.
Analysts such as Phil Ruthven from IBISworld, one of the world’s best researchers of industries and business notes the rebound of the Australian stock market after a significant fall is between 30% and 80% in the following year. The current environment could be compared to a hurricane or bushfire where you simply have to batten down the hatches, but ultimately recovery, regrowth and rejuvenation will follow.
Patience is a common attribute among great investors. In our view, the ability to be patient and take a long-term view is important because, while equities have historically delivered growth in excess of all the other major asset classes, in the short-term the value of a company’s shares may be susceptible to sentiment and irrational buying and selling. Over the longer-term, the true underlying value of a company is likely to be acknowledged by the wider market, benefiting those investors who stuck with it.
Those who keep their nerve when times are tough, and supply capital when it is needed most, play a valuable role – and are generally richly rewarded. This time is likely to be no different.
And to conclude, some wonderful quotes from investment masters:
“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
Benjamin Graham,1 father of value investing
“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”
Peter Lynch, legendary investor and author
“Be fearful when others are greedy. Be greedy when others are fearful.”
Warren Buffett, Chairman, Berkshire Hathaway
“The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future.”
John Maynard Keynes, economist