Coronavirus investing: 6 strategies to survive the downturn

COLUMN, THE AUSTRALIAN, 21 APRIL 2020

by Don Stammer

The coronavirus pandemic has brought the global economy to its knees. To reduce the spread of the virus, most countries have introduced lockdowns, social distancing and new quarantining rules. To support jobs and spending, governments quickly committed to massive increases in public spending, much of it on job subsidies. Monetary policies, too, are more accommodative than ever before. 

Average share prices have swung widely since 20 February – first plunging by 35 per cent, and then restoring about half of those losses when hints appeared the pandemic was passing its peak.

Here’s a list of what investors might like to keep front of mind when thinking about the sharemarket outlook over the short-term and in the longer run.

1. Recall the lessons of history

This isn’t the first time the world economy has slowed abruptly or investment markets have been gripped by panic. Usually, the majority view during the crisis was that any recovery would be drawn out and partial; afterwards, the world would be very different; and we’d have to grapple with an austere and unpleasant “new normal”.

Reality rarely turned out to be as bad as what had been feared. Asset prices and economic conditions usually strengthened sooner than expected. Most aspects of business and investing reverted to familiar themes. In retrospect, each crisis was a time for investors to buy quality shares, not sell them.

S&P/ASX 200 Index closed down 134.54 points at 5353.0 points

Here are four examples from the past half-century. In the global financial crisis of 2008, the prevailing view was it would be followed by a decade or two of low and interrupted economic growth, high and sustained unemployment, and negligible returns from shares. In fact, the outcome was 10 years of (admittedly moderate) economic growth, strong gains in jobs, and a bull market in shares.

In 2001, the terrorist attacks on the US were thought likely to leave a world that “would never be the same again”, but that didn’t happen. In October 1987, sharemarkets collapsed — our share prices plunged 25 per cent in 25 minutes — evoking expectations that, like the crash of 1929, a great depression would follow; it didn’t. In the 1970s, when oil prices increased sixfold, the prosperity of western economies seemed doomed, and “stagflation” was thought to be a lasting affliction, but stagflation was beaten and oil prices didn’t keep on going up.

2. Watch the key numbers on the pandemic

It’s early days yet, but the pandemic seems to have eased its grip in China, where it originated, and appears to be topping out in Europe and the US. Australia and New Zealand have kept rates of infection and of deaths at levels well below the global averages. But further outbreaks could occur; investors should keep watch on how numbers of people with the coronavirus virus are trending.

3. Carefully watch what happens as recently introduced rules are relaxed

Until a vaccine is found, and can be mass-produced, relaxation of stay-at-home rules and social distancing requirements will be risky. A staged easing will be required, with governments getting rid of measures that have little effect on the rate of new infections but which can reduce the economic and social costs of the pandemic.

4. Watch for signs of the economic upturn, but expect markets to remain preoccupied with negative economic data

Worldwide, the shift to supportive macro-economic policies is on an unprecedented scale. For example, the US, Japanese and Australian governments are each increasing their discretionary spending by more than 10 per cent of GDP; if required, additional funds will be made available. At some stage — in my view, around the end of 2020 — a significant impact will be felt on global economic activity.

In coming months, however, sharemarkets are likely to pay more attention to bleak reports on how much economic conditions have weakened, on the ­downgrades in corporate earnings, and in Australia on exaggerating the prospective cuts in dividends.

5. Be on the lookout to buy quality shares while they’re cheap

It’s likely the turbulent times in sharemarkets will continue for quite a while. Investors with cash and who understand the risks will have opportunities.

Howard Marks, who has long experience as an investor, recently summarised his thinking this way: “Terrible news makes it hard to buy and causes many people to say, ‘I am not going to catch a falling knife’. But it also pushes prices to absurdly low levels. That’s why I so like the headline ‘When the time comes to buy, you won’t want to’. It’s not easy to buy when the news is terrible, prices are collapsing and it’s impossible to have an idea where the bottom lies. But doing so should be the investor’s greatest aspiration. The bottom line for me is that I’m not at all troubled saying (a) markets may well be lower sometime in coming months and (b) we’re buying today when we find good value. I don’t find these statements inconsistent.”

6. Be thinking about, but not yet acting on, later implications of the unwinding of fiscal and monetary largesse now under way

The fiscal and monetary largesse governments are — necessarily — now dispensing will need to be unwound and ultimately reversed over coming years. My next column will outline the long-term implications, but my present focus as an investor is on getting across the “bridge” we hear a lot about, and also the first set of hills.