The coronavirus has created an unprecedented market environment. Do the usual rules still apply?
- To cushion the impact of social distancing, fiscal stimulus will have to go way beyond its current level of slightly over 1 per cent of global GDP
- The current volatility is a reminder that investment strategies matter when it comes to how portfolios behave during a rapid market downturn
Fears related to the global spread of Covid-19 continue to grip markets. Several economies are at a standstill, volatility reigns and a general sense of unease permeates almost every corner of our lives. Such are the consequences of a public health crisis which precipitates an economic downturn.
Uncertain investors are prone to make mistakes. We can all repeat the “be disciplined and stay invested” mantra to ourselves as many times as we want, but that doesn’t change the fact that we are living through a market environment without precedent. It is reasonable to ask if the rules still apply.
To help sort through the constant influx of news, I address five questions: How has this disease progressed? What will be the economic impact of its progress and measures to contain it? How effective will monetary and fiscal policy changes be at mitigating these effects? How will markets respond? And, what would a rational and disciplined investment strategy look like?
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It’s a tough pill to swallow, but central banks cannot do all the heavy lifting on their own. They can lower funding costs for banks and businesses. They can make lending easier and more attractive for financial institutions. They can be the lenders of last resort and guardians of liquidity. However, they cannot create demand out of thin air.
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Something is better than nothing, but mitigation of the costs of social distancing will require more drastic action on the part of governments.
This need for assurance that they will be able to exit positions quickly and the desire to hold large amounts of cash has revealed stress points in the financial system. Some of the emergency measures announced by central banks are an effort to shore up these areas and may prompt regulatory changes soon.
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At the very least, such rapid changes in market behaviour have forced us to remember that our investment strategies always need to account for how portfolios will behave during a rapid downturn in markets. Portfolios need to be built to achieve investment goals. And one of those goals should be to withstand a market downturn.
When the world emerges from this pandemic, which will happen eventually, investors who were prepared for market disruptions are likely to be in a better position to benefit from the recovery than those who panicked. The depth and duration of this market sell-off will be determined by a large number of factors, most importantly the progress of the Covid-19 infection.
Hannah Anderson is a global market strategist at JP Morgan Asset Management
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