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THIS TIME IS DIFFERENT

How to keep your head when other investors are losing theirs

Investors should keep calm amid the market panic and look out for signs of a market bottom to re-enter

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The safest time to enter the market is not in the middle of the sharp declines, but during a re-test of the previously established bottom.

LAST month's column discussed investing during global health emergencies. Since then the situation, which originally looked to be confined primarily in China, has become global.

The government response, especially in Italy which was the first country outside of Asia to institute a full lockdown of the country, has caused a market panic and the fastest drop in global equities since 1987's Black Monday crash.

Any logical discussions about the current spread of Covid-19 are irrelevant. Yes, as at today almost 10,000 people have died. Yes, more than 3,000 people die every day from traffic accidents in the US alone. And yes, H1N1 (the 'swine flu') in 2009 infected over one billion people globally, and caused half a million deaths. All these statistics matter little during a panic. The fear can be attributed to the still many unknowns about the virus.

The mortality rate is significantly higher in 70+ year olds, and children don't seem to be severely affected. However, it is unclear why young medical workers that care for infected patients seem to be at a significantly higher risk of dying.

Unlike the common flu, where infected people are clearly sick and the mortality rate is low, with Covid-19 there are many carriers of the virus which exhibit little in the way of symptoms. This should be a positive, as the case fatality rate of this virus is surely lower than the currently reported 2-3 per cent level. The flip side is that this is a negative as these people can carry on about their daily lives, causing the infection to spread further as they do not realise they are infected. The uncertainty of this risk has caused multiple countries to institute travel bans and implement 'social distancing' in a bid to control the spread of the virus. This decision has precipitated the panic and current bear market we are in, as the economic toll of countries implementing such measures will be severe.

Confusing

To confuse things further, epidemiologists have different conclusions about the virus, ranging from 'a more severe version of influenza that will fade in the summer' to 'a mutation that could infect 70 per cent of the world'. One thing that most agree on is that that China's mortality rate was higher due to the high percentage of smokers, as Covid-19 is a respiratory system infection. If you were waiting for a strong reason to quit smoking, this is about as good as it gets.

Take all of this together, and no one knows what to expect. Will the virus fizzle out by summer, as coronaviruses tend to do, or will it last more than one year? Will a vaccine be found, or will this be something we will have to deal with longer term, like the yearly influenza?

Any calls of a market bottom with all these uncertainties risks accusations of being too complacent about the risks, or being the subject of ridicule. Ben Bernanke, former Federal Reserve chairman, was ridiculed for his comment about seeing 'green shoots' in the US economy in the midst of the 2008-2009 Great Financial Crisis. He first made these comments on March 15, 2009, just one week after what turned out to be the absolute low in equity markets. That's about as good as you can get in market timing, something which is rarely said of any economist.

As my column last month highlighted, investors need to make decisions when faced with uncertainty about the future outcome. Making good decisions during a times of panic becomes even more critical.

In the last few weeks I've received videos to ward off virus infections ranging from eating bananas to gargling vinegar daily to kill the virus in your throat, before it progresses to your lungs. France's health ministry had to issue a warning that, contrary to a message that went viral, cocaine does not protect against Covid-19. With all the misinformation floating around in WhatsApp videos and missives by anonymous authors about what to do, we should instead be relying on the analysis of epidemiologists. While these are far from unanimous in their conclusions, they are based on the best factual data available at the time, instead of weak opinions.

A clear difference

One clear difference here is that unlike a financial crisis where Central Banks can do 'whatever it takes' to save the financial system, interest rate cuts have little effect on consumer confidence, and will not fix the current issues. Central Bank stimulus will need to address the risks of a protracted economic slump that affects every business when consumers stay at home and stop spending, so that the loss of economic activity can be offset until either a cure is found, or the virus infection rate drops on its own.

The market's current sell-off is a justified fear that governments around the world are unable to address this, causing a wide swath of bankruptcies in restaurants, airlines, and similar businesses.

How the virus outbreak will be resolved is still unclear. Some people believe that this will not be resolved for at least 18 months and are selling equities into the downturn. Others are forced to sell by banks, as they've been caught leveraged long at the peak, and are suffering margin calls.

If, on the other hand, you are not leveraged, and believe that the world will get past this current crisis and panic just like we have done in the past with every crisis (whether a pandemic or an economic one), below is a list of things to look out for in determining a market bottom. We are firmly in this camp.

  • A peak in day-on-day global new infection cases, defined as a descending ('concave') slope on the logarithmic scale of new infected people. China has already achieved this. Iran has as well, and Italy looks to be close. The US growth of infected however is still exponential, and as the biggest economy in the world, it is critical to watch for a peak in this measure for the US.
  • Any re-acceleration of infected growth in countries like China needs to be monitored. This is not our base case, but if there's any hint of this happening, the bottom will be delayed further.
  • A re-test of the bottom. The safest time to enter the market is not in the middle of the sharp declines, but during a re-test of the previously established bottom. Bear markets are resolved this way 70 per cent of the time. Absolute V-shape bottoms are rare, and far too much money has been lost in trying to catch the absolute bottom during the initial phase of sharp declines.
  • While the cause of this market crash is a pandemic, and different from 1987 and 2008, the resolution of sharp bear markets are remarkably similar. There were many correlations between the Hang Seng Index Sars low and the S&P500 2009 GFC low. Investors need to have a 'bear market bottom' playbook to guide them in what to look for.
  • Internal market divergences at the re-test. Just looking at the index price is not enough. It needs to be assessed together with volatility, volume, and number of stocks that are not making new lows.
  • Asia is more advanced in this crisis than the rest of the world. Outperformance of China stock markets versus the rest of the world, which we are starting to see now, should continue. Italy should also emerge out of it sooner than other countries in the West.
  • Unconventional central bank monetary policy that goes beyond what has been announced so far. This will be in the form of Modern Monetary Theory (MMT), which we discussed in the November 2019 Business Times article.

Rudyard Kipling wrote a poem that started with what has now become a famous investment adage: 'If you can keep your head when all about you are losing theirs' is more relevant in the current panic than ever.

In the meantime, like last month, continue to wash your hands frequently, and stay safe. And if you're a smoker, think about quitting.

  • The writer is co-founder of AL Wealth Partners, an independent Singapore-based company providing investment and fund-management services to endowments and family offices, and wealth-advisory services