Learning to live with the virus

Learning to live with the virus

The COVID-19 pandemic is a defining moment for the world – for our way of living, our values and principles, and for what might become of our vision for the future. Our globally interconnected societies, businesses, and economies have been deeply affected, by the extraordinary measures put in place to halt the spread of the novel coronavirus. The daily death toll, the number of new infection cases, and all the other coronavirus updates that invade our screens seem to stoke fear and anxiety – too much, in my view. Humanity will move beyond this dark phase in time and adjust once we learn to live with the virus. So what is the right approach to investing wealth in such an environment, and what have we learned from this period in history?

"Humanity will move beyond this dark phase in time and adjust once we learn to live with the virus."

Looking back to February and March, when the COVID-19 pandemic started to affect financial markets and the economy in a significant way, we did not know much about the virus other than the alarming pictures of overrun hospitals and deserted streets in China and Italy. For many weeks, it was not clear how severe the impact of this disease would be and how long the economic lockdowns would last. Some estimates were very disturbing and the uncertainty was considerable.

Most of the predictions turned out to be wrong, especially on the spread of the virus itself, and it was nowhere near as deadly and dangerous to the broader population as some of the initial models predicted. We also know much more in the meantime, particularly with regard to how the pandemic will likely affect global economic growth, and the response of policy makers to it. As more and more countries ease lockdown restrictions, I believe it is a good time to take stock of the situation and present some key conclusions for investors.

Do not panic or change investment goals mid-crisis

Every crisis eventually ends and a disciplined investment process is key to identify the right time to act. When the crisis began to impact financial markets, there was little time to respond. The S&P 500, for example, lost more than 30% in just 23 trading days. Rather than rushing to make trades at the height of the crisis and market turmoil, we advocated tempering panic with patience, focusing instead on the fundamental long-term situation of financial markets and the economy.

"Temper panic with patience and focus on the fundamental long-term situation of the financial markets and economy"

On the back of very strong policy responses on the monetary and fiscal side announced near the end of March, the Investment Committee members decided with greater confidence that the economic fallout from the crisis could be contained to a sharp but temporary contraction, and we decided to take the first steps in raising portfolio positions in equities and credit markets. Markets have already recovered more than half of their previous losses and the technology-focused Nasdaq is once again close to its all-time high.

The key takeaway is this: riding out periods of market stress is painful, but it is in extraordinary times like these that a contrarian mindset combined with well-established investment processes, expert teams, and diversified strategies reveal their worth for long-term wealth building or preservation.

Dial down the anxiety

People can adapt more quickly than you think. A few months into the pandemic, a new normal is starting to take shape. Social distancing, working and learning from home, and handwashing have proven to be effective in slowing the spread of this disease. The more widespread use of contact tracing and testing is also helping to keep the number of new cases in check. In short, we are learning to live with the virus.

"...hold the course, and make investment decisions based on evidence and facts"

The key takeaway: now is the time to dial down COVID-19 anxiety, and decouple it from the way you make investment decisions. Obsessing over daily rising and falling infection numbers will not help your investment strategy at this point. Focus instead on the fundamentals and the actions of policy makers, hold the course, and make decisions based on evidence and facts. Markets are forward-looking: they have moved beyond the current bad economic news and advanced sharply since hitting the lows. They are unlikely to test those lows again. Do not wait for them to do so – it can be a costly mistake.

There is reason for optimism

Policy makers have quickly come to grips with the economic consequences and market reaction stemming from the COVID-19 lockdowns, and have acted decisively. When it became clear that the lockdowns would result in a steep global recession, governments and central banks around the world launched monetary and fiscal measures of unprecedented scale. The objective is to keep households and companies liquid during the crisis and prevent structural damage to the real economy. Policy makers have made it abundantly clear that they are willing to use all their policy tools to support their economies.

The key takeaway: expect further support measures if the situation deteriorates. Such measures significantly reduce the risk of a protracted economic depression. For investors, it is very risky to stand against this tidal wave of money from policy makers so consider twice what you think you know that they do not.

A life lived forwards

Start looking ahead. Now that more and more countries are moving out of lockdown mode, and people are adapting to their new normal life with COVID-19 risks, attention is starting to shift back to previous issues that had faded into the background during the height of the crisis. Tensions between China and the USA over trade and now COVID-19, geopolitical influence, and technology leadership have moved to the forefront again, triggering some market volatility in May.

Negotiations between the UK and the European Union (EU) about a post-Brexit trade deal are not progressing as well as both parties may have hoped. In addition, geopolitical tensions in the Middle East could become an issue over the next few months with the disruption in oil markets. Investing well entails accepting the peaks and the troughs of these risks in the markets. This crisis has created huge dislocations, which for the careful and smart investor offer significant opportunities. I am convinced that we are seeing – and saw – some of the biggest investment opportunities in a generation.

The key takeaway: start to look beyond COVID-19 when investing in financial markets, and look to invest in the secular trends that it has created or reinforced. Our Supertrends framework does exactly that, and has recently been updated to reflect what we have learned so far from the COVID-19 crisis. It also includes a new Supertrend focused on climate change, which in my view is a much bigger crisis for all of us to deal with than COVID-19.

"The ability to shift – in the darkest hour of the crisis or at the dawn of a recovery – between sectors and regions and adapt risk appetite within a portfolio context amid a dynamically changing economic and market situation will make all the difference in terms of performance over the medium to long term."

Final thoughts

I believe an active investment approach is key to navigate this new environment. Clients need to invest their wealth where they have strong convictions, and where they feel they will have an impact on the course of the world, or at least how their wealth should develop. As always, a crisis like this one tends to come out of the blue – like colorful swans, affecting individual regions and sectors in very different and unpredictable ways. In my view, the ability to shift – in the darkest hour of the crisis or at the dawn of a recovery – between sectors and regions and adapt risk appetite within a portfolio context amid a dynamically changing economic and market situation will make all the difference in terms of performance over the medium to long term. This is how we have steered through the COVID-19 crisis – one among many threats to humanity that we humans will have to live with.

Andreas Gasser

In Ausbildung/Studium: Selbstständig

4y

We’ll the teamsters rasters feels the time in Tass moment. The property upon itself commanded client com we journey said in practice troopers mashing the reality

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Reply
Chris (Christian) Elsmark

Distribution, Client Service & Marketing | Asset Management

4y

Michael, I enjoyed reading this thoughtful post. While you write "Markets are forward-looking", it should not be forgotten that the stock market is not the economy. Investment solutions for the road ahead need to reflect both changes with a family's wealth circumstances (e.g. permanent vs temporary capital loss) and in the external environment. Wishing you and your clients continued prosperity and good health - and happiness.

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