Well what a quarter that was! The global stockmarket having given investors 20% in 2019 took it back in full, in just four weeks. Coronavirus was the obvious trigger but markets looked too optimistically priced as we have been saying for a while now; so it wasn’t the only reason for the fall. The global shutdown that we are all experiencing will undoubtedly have an impact on economies and companies as consumption and production simultaneously dries up for an unspecified amount of time. Some companies will go bust despite government and central bank intervention and some of these have been on life-support for a decade now and we may be better off without them. There will also be corporate winners and sadly it looks like one of these might be Amazon, a company that has made some of its money from exploiting staff and not paying tax.
There really was nowhere to hide from the stockmarket losses this time except in UK Government Gilts. We have seen multiple claims from active fund managers that this time fixed interest wouldn’t provide downside protection and that they had found some newfangled asset class that would. The first serious market drop for a decade showed what a nonsense this was. For a long time we have heard from these same investment managers that in times like this you need active management, rather than the cheaper passive alternative. However with a few exceptions, yet again, many active managers have failed to outperform our passive benchmarks once costs are taken into account.
It may sound counterintuitive but the only good point about this market fall was the speed of the drop. As we know from numerous academic studies that the best investor behaviour is to stay invested, a quick drop is easier to deal with than a long drawn out one such as the one in 2008 or worse 2001/2002/2003.
Despite what some commentators are saying, Coronavirus is not a Black Swan event (a large and unpredictable risk) but a Grey Rhino event (a large and predictable risk). A global pandemic has been predicted for years and even practiced for by the US government last year (with disastrous results by all accounts). We hadn’t foreseen a pandemic hitting this year and have been more concerned (and remain concerned) about the global health and economic impacts of antibiotic resistance and/or climate change.
Globally we have run up financial and ecological debts that we are expecting our children and grandchildren to pay for. Post-virus we will need to look again at how we have structured our society and who pays. In the UK a Conservative government is already talking about tax rises, so the Alpha added to a portfolio by financial planning is only set to increase.