Calm, Strategic Investing will see us through Virus Firestorm 

by | Jun 1, 2020

What will the investment sector look like post-pandemic?

The Covid-19 pandemic has swept the world like a firestorm, resulting in a shell-shocked global economy and frayed social fabric. Just one thing is certain as we look to a future beyond lockdowns: this crisis will bring about lasting structural changes about which we can only guess.

We are firm believers in the importance of staying invested through market cycles, even when it feels uncomfortable. Market volatility is one of the few reliable things you can predict in the investment world; you don’t know what prices are going to do next month or next year. All we know is that prices are going to move about, often more than the investment fundamentals and underlying cash flows of the asset classes.

Saying that we’re living in volatile times right now is an understatement. In March, the first wave of the pandemic hitting many countries coincided with an oil war between Saudi Arabia and Russia, causing a collapse in the oil price, a global markets liquidity crunch and in South Africa a ratings downgrade. Together, these caused a sharp contraction in the markets in March, but by April we were already seeing a market recovery. And while many economists are predicting a global recession, it’s important to remember that stock markets are not the economy; the market always looks forward and through the noise.

What will the investment sector look like post-pandemic? The immediate impact will be felt by small and medium enterprises (SMEs) operating in the sectors most affected by the lockdown, with resulting unemployment. There will be casualties and business closures, but many companies will survive and emerge stronger as they adapt their businesses to the new world. We will also see new businesses and industries rise as a result of market demands associated with the new world. It is all about adapting to new markets and realities, and doing what is necessary to stay relevant and alive.

From an investment perspective, in times of market volatility mispricing occurs, providing investors with opportunities to buy quality businesses at attractive prices. For investors, we believe that while the economic environment will be much tougher, we’re going to see an increase in the willingness to save and the importance of having these savings for uncertain times. There will be a shift in the way we spend our income, with a greater awareness of our discretionary spend. This will be a good outcome as South Africans have traditionally been undersaved, and regardless of income, most live from month to month.

We’re going to see far less comfort in the traditional concept of a job. Many people have had a false sense of security about earning salaries and are permanently employed. This pandemic has shown how quickly that perceived safety net can be whisked away. We are all more vulnerable than we ever imagined. We can expect to see people looking to diversify their income streams to build up their savings pool.

The psychological effects on investors will vary and the role of the financial adviser in a post-Covid world will become critical. The big shift we are going to see is a greater focus on the role of the adviser as a behavioural coach and providing holistic financial advice. Their most important role in a post-Covid world will be to help their clients avoid emotional decisions and not overreact during periods of market volatility. They should be steering people away from selling out their investments at the bottom. Helping them stay the course, stay focused on their financial plans and stick to their goals at a time when their income and spending patterns may have changed.

One of our concerns is that the psychological effect of the pandemic will put a dent in South Africa’s legendary entrepreneurial spirit. We worry that the lasting scars will make our small business owners and investors more cautious and less willing to take chances and restart. Hopefully our unquenchable optimism will shine through and become a driving force in the broader recovery of the country and its economy.

What can investors do to prepare for a world beyond Covid? The most important thing is to realise that the emotional reactions they are experiencing as a result of the pandemic, and its effects on their investments, are perfectly normal. Research has shown that investors feel the pain of losses twice as much as they enjoy the pleasure of gains. A natural reaction to financial loss is fight, flight or freeze, and thus the burning need to do something. But they should not succumb to the urge to act on those emotions. Rather, they should speak to their financial advisers and get back to their original goals, which, for most people is to replicate today’s lifestyle tomorrow.

That might even mean seeing this period of upheaval as an opportunity. Our view is that when we have periods of market volatility it is often a time when investors should be adding more to their investments rather than taking them away.

Legendary investor Warren Buffett always says he likes his stocks the way he likes his socks: on sale. There’s an old saying in the investment community that you make your money at times like this. You just don’t know it at the time.

 

This article was originally written for the Business Day Business Beyond Covid series”. Read the original article here.

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