Covid 19 – Our take on the current situation & markets

23rd March 2020

Although it may seem like the world is falling apart around you with markets heading south daily, and the numbers of reported cases and deaths each day caused by the Covid 19 outbreak on the rise, rest assured, this is not the end of the world as we know it.

Mark Dean Wealth Management might have only been in business since 2010, but we have some very experienced advisers with many years of experience behind them, and have lived and worked through times like these before.

Admittedly, every market down-turn is triggered by a different set of circumstances. This time it happens to be all about the virus outbreak that no one could have foreseen, but last time is was the ‘credit crunch’ (as it was often referred to) and everyone then thought it was the end of the world.

Without wanting to sound too clichéd, it’s always darkest before dawn. But more importantly in this situation, while it might feel terrifying, the world is not ending. The financial system is not about to collapse. Even before the virus outbreak began to affect financial markets there were good fundamentals and a reasonably optimistic outlook on global future growth prospects.

So What next?

Frankly we don’t know – and we’re certainly not going to try and guess. What we do know is that a company trading at a third or even 50% cheaper than it was only a few weeks ago, when we were quite aware that it already faced a tough couple of quarters, is a buying opportunity – not a time to sell in a panic.

The psychology of investors frequently leads them to overlook something staring at them in the face, until they suddenly reverse course and pathologically focus on that set of facts that they had previously dismissed as unimportant. Hence the complete shift in investor sentiment between February and today concerning the impact of the Coronavirus.

The late economist Charles Kindleberger, author of the classic “Manias, Panics, and Crashes”, poignantly exposed numerous examples of situations where investor exuberance gives way to a reality check (how coronavirus will cause economic distress in this case) and led the financial system to move into a distressed state, followed closely by panic. And this is where we are at present.

Lessons of the past

To put this into some sort of perspective, at similar points in recent US bear markets, the equity correction following 9/11 led to markets dropping by 14% and did not lead to a technical recession, defined as two consecutive quarters of negative GDP growth. The bear market in 2008/09 saw a market drop of 19% at this point in the correction, but this led to a serious recession which took years for the US and Europe to recover to Q1 2008 GDP levels.

The current market has already fallen by almost 30% since late February and could fall further, but this seems overdone given that the inevitable recession seems more likely to be sharp and short. Unlike the 2008 crisis, which could have imitated the 1930s had governments not learned lessons from the Great Depression (when 1929 US GDP did not recover until the 1940s), this will be a time-limited recession (i.e. discover a vaccine or slowdown the growth rate), and one which will be greatly aided by the fiscal packages that governments have announced over the past few weeks and further measures that will undoubtedly follow.

Even if financial markets decline further over the next few weeks, there is not the systemic risk that existed in 2008 and markets have almost certainly oversold, leaving an almost unprecedented opportunity in the next few weeks and months.

What about the science ?

We’re no epidemiologists, but the one thing we do know is that this will pass at some point and markets will rebound. The infection rates right now are horrifying, even if the mortality rate gives us some comfort.

The measures that governments in the western world up until now have been taking have been found wanting and are therefore likely to enforce those measures even stronger with fines and penalties. This can only contribute to rising fear and panic that is exponentially more infectious than the coronavirus. Scaremongering media also doesn’t help. Uninformed comments from politicians and commentators don’t help.

From the basic facts that we understand, lead us to believe that in 6-12 months we will look back on this horrific period with a sense of relief and a more relaxed and considered perspective. We are not going to attempt to offer an opinion on the science behind the coronavirus contagion, but there are certainly strong signs of encouragement that are being ignored by financial markets as Europe and the USA move further into meltdown.

First, there is a clear sign of slowing infection rates in China, meaning that the current restrictive practices in Europe and the onset of summer perhaps offers tangible hope to the Northern Hemisphere countries.

Second, against this backdrop of slowing infection rates, UBS reports that only 0.005% of the Chinese population is infected. Even if all these people were to die, and this was to be followed by much larger infection/death statistics in Europe and North America on a per capita basis, these numbers are far smaller than what the financial markets are currently discounting.

Third, scientists around the world are concentrating on providing a vaccine solution in what would appear to be an unparalleled coordination by the global scientific community. Moreover, this was originally given impetus by the Chinese efforts to sequence the genetic material of SARS-CoV-2 and sharing that sequence with research groups around the world. As a result, 35 companies and academic institutions are working to create such a vaccine, and the first human trials are starting imminently. Although a breakthrough on developing a vaccine puts an instant end to this current crisis, the fact that progress is being made on several fronts will soon filter through to the general public over the coming months and even pessimists believe that a vaccine solution is 12 to 18 months away. Yet this virus is unprecedented in so many ways, and so it is in respect to the amount of resources dedicated to the problem, meaning that it is not inconceivable that a vaccine will be found considerably sooner.

The World Health Organisation (WHO) reported a Case Fatality Rate as high as 3.4%, and this dramatically increased bearish sentiment in the markets, but this simply measures the number of deaths divided by the number of reported cases, and it looks increasingly like there are many people who have been infected but have not been reported in the statistics that are offered daily in the press.

The UK’s announcements last week of much more draconian isolation guidelines, also involved the government making the interesting observation that the UK will soon be testing for those who had recovered from the virus but had not been previously tested and might well dramatically increase the denominator and give a much different outlook to what is currently discounted by the markets. Anything approaching this realisation will have a dramatic impact on the global financial markets.

Will the recovery be V, U, L or W shaped?

Again – we don’t know, and we’re not in the business of trying to predict. But experience tells us that for anyone with a time horizon longer than a few months, this is a wonderful buying opportunity. Whether that’s today, or next week, or next month.

Many experts in the investment world have been trying to anticipate if the recovery from this market shock will be a V, U, L or W shaped recovery. In other word’s a ‘V’ shaped recovery means the markets reach the bottom and bounce straight back to where they were before the crisis in about the same time as we have had the crisis. By our reckoning the financial markets seemed to wake up to the fact that this may be a major issue on 19th February, so it has been with us for just over 1 month. We feel it is unlikely that the markets will perform a V shaped recovery and get back to where it was in the next month. There is no expectation in the short term of a vaccine or miracle cure so we can realistically rule out a V shaped recovery.

A ‘U’ shaped recovery is broadly similar to a ‘V’ shaped recovery except it is expected to happen over a slightly longer time period of 4 to 6/12 months and the market gradually recovers.

An ‘L’ shaped recovery is the worst possible scenario where the markets fall and then just continues to flat-line with no recovery occurring.

A ‘W’ shaped recovery is where markets start to show signs of recovery as the numbers of cases reported and resultant deaths begin to decline but all of a sudden, the numbers start to increase again and cause the markets to dip again.

The sheer panic that has infected the markets is due to a feeling of there being an economic black hole whereby it is impossible to measure the financial downside for a given investment.

Remember, markets hate uncertainty and at times like this will almost always over-play their hand in terms of being too pessimistic on the downside or too optimistic on the upside, which in turn provides buying or selling opportunities and as far as we see it, this is a fantastic buying opportunity for investors with a longer term investment horizon.

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