Mark Lister, 12 March 2020

The World Health Organisation (WHO) has declared a global pandemic, US shares are close to entering official bear market (down 20 per cent from the peak) for the first time since the GFC, central banks and governments are in the midst of deploying massive stimulus, and we're probably not far away from facing some level of restriction on our movement and activity here in New Zealand.

This has happened extremely quickly. The S&P 500 in the US peaked on February 19, while the local NZX 50 hit an all-time high two days later. Some 15 and 13 trading sessions later, here we are facing a probable recession of some magnitude, and a severe sell-off in risk assets.

Overnight the S&P 500 closed 19.0 per cent lower than those peak levels, while the NZX 50 has held up much better, and is down currently just 12.1 per cent from the peak.

We've made plenty of noises in recent years about highly priced markets, increasing risks and the likelihood of an eventual end to the monumental period of strong returns we've seen since the GFC. We've also be singing the praises of (high quality) fixed income in recent months, not because the yields are anything to get excited about, but because we know full well what happens when you get a period like this.

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However, I feel like we could've called this better. All the signs were there a month ago. Extended valuations, bond yields pointing to trouble ahead, worrying footage of empty streets in China that one could've easily predicted would lead to recession if they were replicated in Europe or the US

Maybe it's easier to see in hindsight, as is always the case.

To be fair, I'm not aware of anyone who predicted this, so I'm in good company. A few people did indeed say COVID-19 would push the world into a major slowdown causing a bear market in equities, but those same people have been predicting a collapse since about 2011 so I'm not sure they count. A broken clock is still right twice a day.

So where to from here? I see at least one of the big global banks is now suggesting the S&P 500 will fall another 10 per cent from here, which would take the peak to trough decline to about 28 per cent in total. That’s not quite as bad as the average bear market decline since 1960 of 33 per cent.

US shares are down 19.1 per cent today, so using either those predictions or the average since 1960, we could deduce that we are about 70 per cent of the way through this painful adjustment. Give or take; your guess is as good as mine.

The next three months will be rough for the global economy, financial markets and investors. The newsflow is going to be increasingly worrying, economic indicators will fall off a cliff, and we'll see plenty of profit warnings from companies about how the 2020 financial year is going to look.

Then, at some point, things will get better. Maybe the Northern Hemisphere summer will arrive and take the sting out of the virus, maybe a vaccine will emerge, maybe the number of new cases will naturally peak or maybe financial markets will simply reach maximum pessimism.

The latter could happen well before we see evidence of the situation (or the global economy) improving. Sharemarkets look forward, and the violent moves we've seen over the past two-and-a-half weeks already go some way to factoring in just how ugly the next 12 months could be.

That’s an important point to keep in mind. Markets usually rebound long before we see firm evidence of any improvement. During the GFC, the S&P 500 bottomed out in March 2009, while the world was still in the depths of recession and most people couldn't see any way out. Six months later, the S&P 500 had rallied 53 per cent and anyone who was waiting for proof things were on the improve had missed a fair whack of the rebound.

My point is, if you weren't good enough to stay invested from March 2009 before selling out three weeks ago, what makes you think you'll be able to pick the bottom next week, next month or next year?

The decline has happened faster than anything we’ve seen in decades, so any bounce could be equally swift and difficult to respond to.

My KiwiSaver is 100 per cent equities, and it’s taken a beating over the past month just like everyone else’s. It's not pretty when I check it each morning (probably should stop doing that), although I'm finding myself remarkably relaxed about it.

I expect my balance to keep going lower over the next few months, but I'm not stopping my contributions and I'm certainly not switching it into cash or bonds (I'd rather risk a bit more downside than guarantee myself a next to nothing return over the next five years).

If anything, I might up my regular contributions and try to pick up some of my favourite companies on the cheap. I've always regretted not doing that during the GFC, so I'm determined not to let this opportunity pass me by. Buy on cannons, sell on trumpets.

The biggest loser from all of this could well be President Trump. With the election is coming up in November, the only thing he scores well on – the economy – is taking a turn for the worse at precisely the wrong time for him.

He hasn’t handled the outbreak very well at all in recent days, and this could be just the opportunity Joe Biden and the Democrats need to steal a march over their rivals. I’m sure there will be some who might see that as a bright side amongst all this.

Listed below are seven thoughts for surviving this pandemic, recession, bear market, or all of the above – however it eventually plays out.

This is when your adviser earns their keep.

Use them. Anyone can do well when the going is good, but during times like these your investment adviser will prove their worth. The role of a good adviser is not to predict the path of financial markets, provide trading ideas or to be a start stock picker. He or she will add significant value to your lifetime wealth by ensuring you maintain a disciplined investment strategy, talking you out of poor decisions you could be tempted to make during unnerving periods like this one, and reminding you of your long-term objectives and how they are best achieved.

Your investment objectives haven’t changed, so neither should your strategy.

Most of us are investing in the hope of meeting our long-term objectives, which are usually some five, ten or twenty years into the future. With that in mind, it makes little sense to react to weekly, monthly or yearly volatility. Equities remain a key part of your long-term plan, and we know that over longer investment timeframes they will deliver strong returns with remarkable consistency. Investing isn’t about chasing the ups and downs of the market, it’s about managing a well-constructed portfolio in line with your goals and objectives. Play the long game, stay the course and stick to your strategy.

Keep your ‘defensive line’ intact.

Equities may have had a rough ride, but most investors have diversified portfolios, which means they also hold some cash, good quality fixed income and possibly even a small amount of gold. This part of your portfolio will have held its own during recent weeks and has probably even gone up in value. Your ‘defensive line’ of lower risk assets are doing their job, so there’s no need to sub them off at this point. With regard to gold, I’d probably buy a little more to be honest.

Should we sell everything, ride this out then get back in later?

If things do get worse and markets fall further, selling up could be the right thing to do, but only if you’re good enough to get back in at the right time. If you’re a long-term owner of quality businesses rather than a trader, you might be better off just staying put. Corrections, bear markets and recessions will come and go, but great businesses remain resilient, keep paying dividends and rediscover their former glory sooner or later.

Stay diversified, being at extremes is a poor strategy.

Investing isn’t about being ‘in or out’ of the market, contrary to what some media commentators might have you believe. Economies, markets and currencies ebb and flow, so hedging your bets across different asset classes, geographies and sectors is the least volatile and safest route for most of us. If you’re fully invested in equities you open yourself up to the full force of volatile periods, but you’ll do your future self just as much of a disservice by sitting on the sidelines and missing out on the strong periods (of which there are more).

If you're an accumulator or a new investor, it might soon be time to start taking some risks.

If you need to cash up your portfolio and call on your money soon, corrections and bear markets are awful. However, if you’ve got cash you want to put to work, if you’re still looking to accumulate quality assets, or if you’re a younger investor, periods like this are a huge opportunity. I’ve got at least 20 years until retirement, so I don’t want to buy Microsoft, Mainfreight or CSL when they’re at all-time highs. I want to buy them on sale 25 per cent cheaper if I get the chance. Things could go down further from here, but we’ve already seen some hefty falls so it’s a good time to be thinking about how you can take advantage. Take your time, do so patiently, and in instalments.

Stay calm, and don't panic.

It’s hard not to feel overwhelmed by all the negative news we’re seeing and hearing. However, we don’t make our best decisions when we panic. Stay calm, take a step back, and lean on your trusted adviser for support and guidance. Now and again, steer clear of the business news. The media is almost certainly being more dramatic than necessary.