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Cool heads needed amid market volatility

Published April 2020

As global markets go through an extraordinary level of volatility, we’d like to share these insights from the ANZ Chief Investment Office as they analyse recent market movements and investor response to the coronavirus.


As COVID-19 takes its toll on global markets, and recognising the risk of a prolonged downturn, history has shown that markets will eventually turn; but timing the bounce is near impossible to predict.

Global markets and investors are facing a highly volatile period as COVID-19 makes its way around the world, with a range of asset classes swinging from rallies to losses.

In the last four weeks, more than $700 billion has been wiped off the S&P/ASX 200 Index.

As investors watch the value of their portfolios plunge, some may be tempted to sell shares or move their wealth into “safer” asset classes in an attempt to stop the losses. But we caution this risk may potentially be doing more harm than good by locking in significant losses and missing out on the rebound when it happens.

“While every event-driven downturn is different, historically we have seen sharp rebounds from event-driven bear markets. And investors who sold out late and remained un-invested, missed the reversal when it came – negating the principle of long-term investing,” says Dan Simpson, Head of Portfolio Management, ANZ Private Banking & Advice.


Investing for the long term

Time and again, history has shown that markets are incredibly difficult to predict, particularly in the short term. The basic principles of sensible long-term investing, however, have largely held during the toughest markets and while market volatility can lead to short-term losses, the longer you stay invested, the less these fluctuations generally matter.

Simpson says in many cases when markets have hit turbulence, they bounce back quickly when the recovery begins. Withdrawing completely from the markets risked getting the worst of both worlds, by locking in losses and missing out on the opportunity for the best gains.

“These past weeks have resulted in volatility hitting unprecedented levels — even higher than the GFC,” Simpson says. “Timing markets is incredibly difficult at the best of times, and near impossible in panic-driven environments, like we are currently experiencing”.


All Ords Acc Index - Daily Change


Source: Morningstar 

An extreme example is shown below. This illustration reflects a hypothetical investor selling out at the very bottom of the Global Financial Crisis, then remaining either un-invested completely, or waiting exactly one year to re-invest, thereby missing the rebound when it came.

This is an example only and the result may be substantially different if the investor had sold before the bottom or reinvested earlier, or both.

$10,000 invested
ASX All Ordinaries Total Return Index 1 Jan 2006 - 31 Dec 2019


Source: Morningstar 

Everything but the kitchen sink

Globally, governments and central banks have thrown huge levels of support at this unfolding financial crisis— slashing cash rates, injecting considerable liquidity into markets and delivering multi-billion dollar fiscal packages.

We are only just seeing signs that these moves are starting to settle currently held investor fears, as the continuing spread of COVID-19 is all-pervading. With no end date in sight for the pandemic, this has added to market anxiety.

With several countries now taking aggressive social distancing measures, it is expected that the infection rate will start to decrease and eventually be contained; this should help markets to recover. We have already seen infection rates ease in China and South Korea. According to the World Health Organisation (WHO) and based on the number of new cases recorded, Europe and the US now appear most vulnerable.


New challenges

This is the first time a disease outbreak has triggered this extreme level of market volatility that surpassed the level seen during the global financial crisis. While accommodative monetary policy has been effective in the past, lower interest rates and other measures to boost consumer spending might not help as much when consumers are quarantined at home. Additionally, interest rates are already extremely low, and in some cases negative, reducing the capacity of central banks to make an effective monetary policy response.

At the moment, there is a sense around the world that the worst is yet to come. Whether this is true or not, consumers are fearful of the impact of the virus on their lives and loved ones, and the economic fallout to follow. These fears may continue to push markets down for the time being.

But those who are invested for the long term may do well to stay calm and avoid rash decisions. The true impact of this virus will only be known for certain well after it has passed.

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