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Investment in the time of coronavirus: how to buck the bear

Events from history offer some guidance
May 5, 2020

For investors the past few weeks have been sobering. Stock market falls have been violently swift. Subsequent bounce backs have been partial and spasmodic, and may in any case be deceptive. For those who have put their investing on hold, when is the right moment to re-enter the water? 

The recovery from the previous bear market over a decade ago offers some guidance. The last comparable shock to equity markets occurred at the height of the financial crisis. Indeed the decline in global stocks in the first quarter of 2020, of just over a fifth, was only a little less than the fall in the final quarter of 2008. Nerves were jangling then, too, but equities did start to pick up again in 2009, rewarding those who started to buy that year.

But there was nothing automatic about that recovery in the markets. It came about because policymakers got on top of the financial crisis, through two decisive steps. First and foremost, they recapitalised the banks, which were at the heart of the problem. And second, the US Federal Reserve and then the Bank of England adopted quantitative easing, overcoming fears that central banks had run out of ammunition after lowering interest rates close to zero. 

Public health rather than the health of the banking system is at the heart of the coronavirus crash. A sustained recovery in stock markets will occur only when investors can see that governments are getting a grip on the epidemic. That goes beyond arresting the initial wave in cases and deaths, though that is an essential first step. 

The economic impact of coronavirus has been crippling because medieval remedies—the word quarantine stems from the 40 days (quaranta giorni) that vessels from infected cities had to wait before landing in 14th-century Venice—are being used to fight the epidemic. Adopting the techniques used by South Korea, testing and smartphone surveillance, would be far superior, whatever the understandable worries about personal privacy. That will provide a key to re-opening economies that are now on course to experience even worse reverses than during the “great recession.” 

Even with more sophisticated public health measures, the worry is a continuing cycle of outbreaks and partial lockdowns will prevent economies from springing fully back to life. A complete economic recovery will be possible only when drugs can be found to combat the illness and ultimately a vaccine is developed to prevent it. What is uncertain is precisely when that will happen. 

But what matters to investors is a clear line of sight, both to a more effective temporary approach in tackling coronavirus and to a permanent solution. Only when that comes more sharply into focus will investors be able to get a better grasp of the shape and dynamic of economic recovery and the corresponding outlook for earnings among those companies that weather the storm. That will in turn put share valuations on a firmer footing, making it less risky to invest again. 

Caution should remain the watchword. The crisis has demonstrated the virtue of having a balanced portfolio that includes government bonds. Investors should be particularly wary of emerging markets. Developing countries are more likely to lack effective health systems, making them particularly vulnerable to the ravages of coronavirus. 

One big difference from the stock market recovery after the financial crisis will be the diminished role of central banks. They have once again intervened vigorously to calm panicking markets. But that has exhausted their ability to help much further. Investors would be foolish to rely upon central bankers to get them out of trouble again in the years ahead.