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Don’t get out of the market when temperatures run high

18 March 2020 GTC Investment Analytics

Global markets are reeling from the largest declines in the prices of “risky” assets since the global financial crash of 2008. With trillions of rand in value being wiped off various listed equity valuations daily, pension funds and individual retail investors would naturally be worried about just how much money they could lose.

“Historical evidence proves that remaining invested is the best course of action, and that panic-selling to avoid losses actually destroys value,” says Clive Eggers, head of Investment Analytics at leading financial and advisory business GTC.

The cause of the current market fallout is fear and uncertainty about the spread of Coronavirus (Covid-19) and its effects on productivity and sales of companies globally as lockdowns take hold. An additional factor at play is the sudden, sharp drop in the price of oil as Russia, Saudi Arabia and other PEC members drop restrictions on oil production during a period of unprecedented low global demand - to enter what is effectively a price war in pursuit of market share - which will temporarily decimate profits from oil producers and related businesses.

“The impact of these two driving factors on markets has been unexpectedly severe, with the duration and consequences of both issues still unknown,” says Eggers. “Both globally and on the JSE, equities have been sold off sharply, on a synchronised basis.”

The MSCI World Index is shown in blue and the JSE all-share index is shown in green, below.

Equity Market performance in US Dollars (Source: Factset, GTC Investment Analytics)

It is not just equity prices which have suffered either – other asset classes reflect an equally grim picture through 2020 to date:

Index – 09 March 2020

YTD in %

Local Shares (All Share)

-14.12

Local Listed property (J253)

-18.10

Local Bonds (ALBI)

0.32

Global Equities in US Dollars (MSCI World)

-15.08

Global Bonds in US Dollars (Citigroup WGBI)

7.46

Gold

9.88

Oil

-46.37

The Rand versus the US Dollar

-12.38

Despite China gradually gaining control over the spread of Coronavirus and beginning to return to full economic capacity, and the rest of the world implementing protocols for dealing with the virus, the investment community - which has all the benefits of instantaneous news access - is still selling out of some assets.

“Typically, in periods of uncertainty and fear, investors are tempted to move to less risky portfolios in an attempt to avoid losses. But as so many experts have cautioned before, trying to time the market is extremely difficult and almost always leads to value destruction,” continues Eggers.

“Investors should avoid making investment decisions based on short-term market movements, which is what we believe the current circumstances are,” he says.

The chart below illustrates the risk and impact of trying to time investments into or out of the share market. (Source: GTC Investment Analytics)

Based on the FTSE/JSE all-share index, the chart shows that if an investor misses just 10 of the best trading days over an approximate 25-year period (a total of 9039 days), that investor would effectively earn around half the return achievable over that time, had they remained fully invested.

“This would mean a value of R43 992 for an investor who took a ten-day break from the market, versus a much healthier value of R89 484 for an investor who remained invested during those volatile days. It would be almost impossible for even a sophisticated investor to predict when the market had bottomed out and would turn, so any delay getting back into the market would be costly,” Eggers says.

Furthermore, research by JP Morgan in the United States has shown that on average six of the best 10 trading days occurred shortly after the 10 worst trading days.

“These facts explain why trying to time the market almost always results in failure. Given the advantages of remaining invested, as the evidence proves, investors should instead ensure they are invested according to their risk tolerance and investment objective, which should not be impacted by market developments. In most cases, no action should be required from investors,” Eggers concludes.

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