What to do when the markets get infected with a virus
Investment markets around the world are in a state of flux as the world tries to get to grips with the potential impact of Covid-19. All markets have been affected and even safe-haven assets such as gold are not immune. So, how should investors manage their money in this type of situation?
TAKE TIME TO MAKE DECISIONS
Your first reaction to major market events should be to do nothing. This can be difficult because we all have inbuilt fight or flight responses but often standing still is your best defence. Investing is similar to working with herds of large wild animals, and you don’t ever want to be part of a stampede. So, if you are in a new and unpredictable situation where most investors are showing irrational herd behaviour, stop, think and then react. Sometimes that means doing nothing at all.
When considering Covid-19, it is important to start by gaining a proper understanding of the situation and the potential economic impact.
That means looking for real information. Social media is not your friend in situations such as this and WhatsApp groups are probably the most dangerous source of misinformation. Rather use organisations such as the World Health Organisation or the National Institute for Communicable Diseases in SA.
It is really important to ignore the scary predictions of market commentators and other talking heads who are looking for media coverage.
CRAFT YOUR OWN STRATEGY
The major market moves caused by unexpected events can create huge buying opportunities for savvy investors. If you are underinvested in shares, you might consider buying shares over time (phasing in) during these volatile conditions.
If you are prone to panic and would like to sell investments now, resist the urge and rather wait for a while. If you are considering selling shares on the JSE or international markets now, I would have to argue that the horse has bolted and is already on the next farm!
This also applies to those who wish to send money overseas. Exchange rates of more than R16/$ or R20/£ are simply too expensive. Wait for markets to stop panicking. I think a level of R19/£ and R15/$ is probably fair value.
When markets are volatile or expensive, I will wait from three to 12 months before buying shares if I have cash to invest. After the recent market drops, a good phasing period seems to be three months, as I think investments are offering better value than they were in 2019.
If you think it sounds crazy to buy shares in these conditions, consider the news that Warren Buffett’s company, Berkshire Hathaway, increased its shareholding of Delta Air Lines at the end of February, soon after the Covid-19 panic started. I don’t think that will be the only acquisition by Berkshire this year, as it has been waiting for a major opportunity to buy good companies at a better price.
IT IS IMPORTANT TO IGNORE THE SCARY PREDICTIONS OF MARKET COMMENTATORS AND OTHER TALKING HEADS
I think the trade war between China and the US, the protest action in Hong Kong and Covid19 will have a lasting effect on where goods are manufactured and how they are transported.
Companies are realising the danger of manufacturing all their goods in China or relying on China as the only source of certain parts of their goods. In short, global supply chains are too vulnerable to disruptions in China or Hong Kong.
That could be good news for SA as companies will need to move their supply chains to a more regional set-up. This will help us, because we are in a different hemisphere and much closer to Europe.
Over the long term, it might mean that prices for manufactured goods will have to rise slightly but it also means that more countries will benefit, not just those in the Far East.