Presented by Richard Austin, Cambridge Partners Managing Partner
Watch Richard’s video presentation below, or read on for a detailed analysis.
These are extraordinary times. It has been just two weeks since we provided our last update, but a lot has changed.
- The World Health Organisation officially declared Coronavirus a ‘pandemic’ on 11 March 2020
- Travel bans have been put in place around the world, schools are being shut and large events cancelled
- Anyone coming to New Zealand, except those from some Pacific Islands, must go into self-isolation for 14 days
- In the US the Federal Reserve cut its overnight rate to between 0% and 0.25%
- Closer to home, the Reserve Bank of NZ has made an emergency cut to the official cash rate this week, from 1.0% to 0.25% (a drop of 0.75%), which will last for at least the next 12 months
Governments in NZ and around the world are putting in place financial packages to help support business. This may help reduce the impact of the slowdown, but it is likely the economic effects of the virus will be widespread for weeks and months to come.
What is happening in markets?
Share markets react to new information and reflect general investor sentiment. As the scale of the effects of the virus have become known, markets have priced in the expected reduction in company earnings and outlook, causing share prices to fall.
As we release this update, the fall in the US S&P 500 from its recent peak in February has been around 30%. While the Dow Jones has fallen 33%. Returns differ depending on each country, but the falls are of a similar magnitude around the world.
It’s fair to say that investor sentiment has turned almost 180 degrees from being very positive at the start of 2020, following nearly 10 years of gains, to one of being fearful and full of uncertainty.
As we know we know markets are driven by both fear and greed, and we are now seeing a high level of fear return to markets.
What effect will the downturn have on my portfolio?
New Zealand is a relatively small economy and as a net exporter, we are exposed to events that happen around the world.
However, our portfolios contain many thousands of underlying investments to ensure we are not overly exposed to any one specific company, sector of the economy or country.
We also have an approach of holding a high proportion of the portfolios in offshore assets. The benefits of this approach are generally two-fold – our clients receive greater country diversification, but also any losses experienced offshore are dampened if the New Zealand dollar falls.
In addition to holding growth assets like shares, our portfolios also hold defensive assets, such as New Zealand and International Fixed Interest. In times like these, the aim of the defensive assets is to reduce the overall effect of the fall in share prices.
For example, a 50/50 portfolio with 50% in growth assets and 50% in defensive assets is down around 13% from the recent peak in February and around 6% over the past 12 months.
Whilst these are significant falls, and no doubt concerning for investors, its less than the 30% fall that equity markets are experiencing.
Should I sell shares and reduce risk?
Share prices react very quickly to new information. A good starting point is to assume that all the information that is currently known about the virus and other events around the world is effectively ‘priced in’.
As new information becomes available – markets react. If the news is negative or worse than previously predicted, markets generally fall, whereas if the news is positive, or not as bad, markets generally rise.
Whilst we cannot predict tomorrow’s news, or events that are yet to happen, we do know that if investors sell in times of market stress such as these, they are much more likely to lose money, than to gain.
Not only have you got to predict the best time to sell, you have to predict the best time to buy. When investors try and do this, or base decisions on the emotions of fear and greed, they sell after markets have fallen, and buy only after markets have gone up. This is a sure fire way to lose money.
As a client of Cambridge Partners, it is also worth remembering the planning process you went through with your adviser, when you initially determined what type of investment strategy was suitable for your needs and objectives.
This strategy was designed knowing that events like this can, and sometimes do, happen. This means if your plans or objectives haven’t changed, your portfolio may still be appropriate for your long-term objectives.
How long will it take for things to recover?
The short answer is that nobody knows.
However, it looks like the next three months could be rough for the global economy, financial markets and investors. It’s likely that we’ll see plenty of profit warnings from companies and some economies in recession.
But at some point, things will get better. In the Northern Hemisphere the summer will arrive, which may take some sting out of the virus and, at some point, a vaccine may emerge.
It’s important to bear in mind that no one waves a flag, or blows a whistle, when the markets hit their peaks or come off their lows. But at some point, markets will recover – and it is normally before we’ve seen hard evidence of the global economy improving.
If we remember the Global Financial Crisis that started in late 2007, the S&P 500 hit its low in March 2009, while the world was still in the depths of recession and investors couldn’t see a way out.
However, six months later the S&P 500 had rallied 53% – anyone who was sitting on the side lines waiting for firm evidence of the improvement, missed out.
The message here is that abandoning your longer-term investment strategy and reacting to your fears, may hurt your portfolio’s overall performance.
Is there anything I should be doing now?
If you are feeling concerned or anxious – that’s OK and perfectly normal. We encourage you to reach out to your adviser.
There is a heightened level of uncertainty and anxiety at present, but what we do know is that, at some point, markets will recover. However, what we don’t know is exactly when.
In interim, there are some practical measures you could consider:
- If you are regular taking money out of your portfolio, then consider reducing the amount you are withdrawing, or suspend withdrawals for the next few months.
- While it may seem perverse, if you are holding cash in your portfolio, the fall in markets, does represent the opportunity to re-balance into growth assets at these lower prices.
- Work with your adviser to review your current investment strategy and objectives against the outlook for your portfolio.
We also encourage you not to let fear drive your decisions and sell after markets have fallen.
It is a difficult time right now, but we know from experience that you’re much more likely to lose money than to gain, if you try and time the low and high points in markets.
How will the virus affect Cambridge Partners?
Last month as part of our Business Continuity Plan we conducted tests on our processes in the event we had an outbreak of Coronavirus in the office. This included how we would communicate with clients and manage the effects within the office, along with maintaining business as usual.
We’re pleased to advise that our tests were successful and with laptops, mobile phones and secure internet connections we are confident that we will be able to continue to operate at close to normal capacity if we are required to work elsewhere.
We are very conscious of all the health warnings and have advised staff to stay at home if they are feeling at all unwell.
Meetings are still being held in the office and we are monitoring the appropriateness of this daily.
We aim to continue to provide updates as the situation develops. But if you have any questions or concerns, please reach out to your adviser or one of the team.