By Chee Jo-Ey
THE Covid-19 pandemic has sent global equities in a tailspin. What’s more, the Malaysian market has to deal with not only the outbreak, but also a crash in global oil prices and an uncertain political situation.
Most stocks have been battered to below their 52-week lows.
When we speak to financial planners about investment and the risks involved, we often hear things like asset diversification for a balanced portfolio. Simply put, do not put all your eggs in one basket.
But even that might not fly in this circumstance.
According to an Investopedia article, in recent weeks, correlations across market groups were nearly 100% during periods of high volatility, with everything rising or falling at the same time.
So, what’s left for investors to do in times like this when volatility is the new norm?
The author had advised investors to remember that focusing on building up your cash is important in critical times. He advised investors to put cash first in mind, rethink their cash position and make sacrifices to pump up on cash.
Affin Hwang Asset Management portfolio manager Lim Chia Wei said: “One of the most important things an investor can do in such an environment is to ensure that his portfolio is reflective of his risk level and objectives.
“If you have a shorter investment horizon, your portfolio should be at a lower level of risk with higher exposure to more defensive asset classes like fixed income. This helps insulate your portfolio with its more modest drawdowns in periods of market volatility.”
Conversely, if you have a longer investment horizon, the best course of action is probably to stay put and remain disciplined in your investment plan. Consider rebalancing your portfolio to correct any drifts so that your asset allocation matches your target allocation.
Investors who remain disciplined in their approach by investing consistently through dollar-cost averaging are proven to fare better overall compared to those who react impulsively.
Lim continued: ‘Lessons from past pandemics show that their impact on stock markets are transient. The lesson from SARS in 2003 is that the economy and stock markets can quickly recover once the virus contagion recedes.
“With more decisive measures and effective control policies by governments in containing the outbreak, we view the global economic recovery risks as being delayed rather than derailed.”
The quick and measured response from Chinese authorities in containing the outbreak has also soothed fears, as authorities draw upon lessons from past outbreaks like SARS and MERS.
Whilst the asset management house could see impact to China’s 1Q 2020 gross domestic product (GDP), additional fiscal and monetary support may cushion downside to its economy albeit with a lag effect.
Meanwhile, iFast Capital analyst Shawn Low Tian Hao said: ”Times of escalation in market volatility test investors’ discipline. Before taking any investment actions, investors should note that the situation concerning Covid-19 remains fluid. For those looking to deploy their investable capital to capture some growth or value opportunities in the market, we recommend they split their available cash and deploy into the markets in tranches.”
The selloffs have brought previously-expensive markets into more attractive valuations. As such, this could be a decent time to start accumulating assets.
According to Low, the pandemic has taught us how fast narratives could change. At the beginning of February, US equity markets shrugged off Covid-19 concerns on better-than-expected corporate earnings, but in the last week of the month, the narrative and sentiment had swung the other way. As such, regardless of the market situation, one should stay diversified.
A properly diversified portfolio is one which suits a person’s risk profile with a proper mix of bonds and equities. The equity portion allows investors to tap into growth opportunities, while bonds could help provide an anchor to portfolio stability. In an economic downturn, the market impact on a properly diversified portfolio is more likely to allow investors to hold onto their investments. This is because the dent on a balanced portfolio is likely to be less severe than one with concentrated holdings. This would give investors peace of mind in times of market distress.
The rapid news flow from the global economic front has translated to an escalation in market volatility, which induces jittery and uneasy feeling among investors.
The current regime has also taught us that volatility is always part of the investment landscape, and investors should be mentally prepared to weather an extended period of uncertainty.
A proper financial plan and strict discipline can help investors to navigate tough times with little influence from emotions. — March 20, 2020
