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March 23, 2020

Share Market News: COVID-19 Update 2

Share Market News COVID-19 Update-2

News of the continued worldwide spread of the coronavirus has sent equity markets into a spin, with plenty to consider regarding the likely impact on communities, economies and equity markets. Current market conditions are undoubtedly creating considerable uncertainty for some and excitement for others.

While the virus presents a new challenge, there is nothing new about market volatility. Markets have historically survived viral outbreaks to eventually recover and reach new heights. This time the difference is that many can’t recall the last one, and hence fear has kicked in. To put the current conditions into perspective:

  Monday 9 March 2020 :Was the 2nd worst percentage decline in 10 years.
  Tuesday 10 March 2020:Was the 2nd best percentage rally in 10 years.
  Wednesday 11 March 2020:3rd worst percentage decline in 10 years.
  Thursday 12 March 2020:Was the worst decline in 10 years.
  Friday 13 March 2020:Was the best percentage rally in 10 years.
  
  Monday 16 March 2020:Was the biggest decline in 12 years.
  Tuesday 17 March 2020: Was the biggest single-day gain on record since 1997.
  With further declines recorded on Wednesday 18 and Thursday 19 March.

It is not a coincidence that the volatility index (The VIX), is currently 82.7 points. The highest on record (since 1990).

Central banks are using monetary policy and liquidity based measures in an attempt to contain both the spread and effects of the virus on unemployment and economic activity. Interest rates have been cut twice in recent weeks, with the RBA meeting out of cycle, further cutting rates to 0.25%. And we can reasonably expect more to come. Coupled with the recent announcement of an increase to the $17.6bn stimulus package to $66bn, the Government is attempting to contain the possible economic contraction in the coming few quarters.

It’s not all bad news.

When the market fell originally – there was no discrimination between good stocks and bad, with both types falling equally. However, what we have seen in the last week, is grocery chains doing well and the telcos bouncing around whilst travel and tourism stocks take a hit. Success through these challenging times will be from those businesses that swiftly adapt and are agile enough to move with the times. An example of this in action is the announcement from the CEO of GYG (Guzman y Gomez – Mexican fast food chain) introducing free delivery in the coming weeks. Successful businesses will change their process to benefit from changing conditions.

Chinese officials have confirmed that the epidemic is now under control and local communities are getting back on track. At least 90% of major industrial producers outside of the Hubei Province have now resumed operations after the halt. If Australia experiences anything like China has, the period for which it takes to get us back on track, will depend on Government policy regarding containment.

Below are some key points that we believe you should consider during these times:

1. Avoid emotional decision making – whether that be for buying 6 months of toilet paper or selling shares.

“Occasionally, there will be major drops in the market, perhaps of 50 per cent magnitude or even greater. But the combination of The American Tailwind and compounding wonders will make equities the much better long term choice for the individual, who can control his or her emotions. Others? Beware!” – Warren Buffett

Investor Emotion Through a Market Cycle
Some of you may have seen this graph before – There are many studies that show that emotional investor behaviour is likely to lead to sell at market lows and buy at market highs. From time to time, there is inevitably volatility in stock markets as people nervously react to changes in economic, political, corporate and/or global matters. Although historical performance is no guarantee of future market performance, we can certainly anticipate equity markets returning to some level of predictability in time. The key is to stay focused on the long-term objectives, and whilst many may emotionally react to uncertainty, investors should maintain a level head and consider where possible the opportunity of exploiting lower equity prices.

2. Downturns are more common than many may expect

Annual Returns and Intra-Year Declines

The above graph shows that most years have declines, some larger than others, and it doesn’t pay to sell when they do arise. To combat the impact of downturns, the asset allocation within a portfolio will be doing its job of protecting (in part) the capital within the portfolio. Spreading the risk by investing into different investment buckets may curb the contraction of the portfolio value during a downturn.

 

3. Stay focused on the long-term objectives

 

Behavior Gap
Source: Carl Richards @Behaviorgap

The above graph shows that most years have declines, some larger than others, and it doesn’t pay to sell when they do arise. To combat the impact of downturns, the asset allocation within a portfolio will be doing its job of protecting (in part) the capital within the portfolio. Spreading the risk by investing into different investment buckets may curb the contraction of the portfolio value during a downturn.

Ultimately, life will return to normal and equity markets will continue their ebbs and flows as they always have. We expect investors will look back on the current state of play as an opportunity, just as we have seen in most dislocation events through history.

In conclusion, we still believe this is not the next GFC, and is not a sell-up moment.

Please click on the following links which we found interesting reading:

Modoras remain committed to your financial confidence, if you have questions or are not sure what action to take during times of market volatility, please contact a Modoras Planner on 1300 888 803.

IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (Number 233209). The information and opinions contained in this presentation is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. Any individual making any investment or borrowing decisions should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to borrow funds or purchase, sell or hold any particular investment. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of, credit contract entered into or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog may change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.

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