DELPHINE GOVENDER: Look back for the future
Four months ago, you’d never have predicted where you’d be. But there’s only one guide to conquering your anxiety, especially on the markets: history
Cast your mind back four months. What a state of blissful ignorance we were living in, considering what we know today. It was just three months ago, on January 11, that Chinese authorities reported their first death from a new coronavirus, first seen in the city of Wuhan.
Indeed, it was only two months ago, on February 11, that the disease caused by the new virus got a name: Covid-19.
And just a mere month ago, on March 11, that the World Health Organisation declared Covid-19 a pandemic.
Today more than 1.3-million people around the world are infected, 75,000 have died and more than half the world is under some form of lockdown.
If you feel whiplashed by the speed with which your life has changed over the past 30 days, you are not alone. And your investments and the investment markets have delivered a multiplier effect on this, with volatility, sharp and painful declines and faulty restarts the anxious and daily norm.
It’s been such a surreal experience that the main adjective used most pervasively in recent weeks is the word "unprecedented". That description covers it all: the rate at which the oil price tumbled in the early hours of March 8; the shutdown (temporarily, we hope) of entire industries; the staggering rise in global unemployment in a matter of weeks; the imminent collapse in economic growth around the world; and the anticipated obliteration of company profits. Even the uncertainty over the outcome feels unprecedented.
Of course, we have seen crises before. This time, however, the combination of the far-reaching public health effects and the inexorable economic consequences of the social isolation needed to manage the pandemic makes the crisis far different to ones we have witnessed in the modern day.
In the midst of this new and unfolding reality, we have only one dependable anchor to guide our current investment decisionmaking: history. True, there may be few exact reference points from the past to perfectly frame the specific construct we face today, but in the stillness of physical isolation, we should start to see through the noise caused by the herd panic.
What then, according to history and experience, are some of these known knowns? The following:
- After recessions (of any shape), there is always a recovery;
- Fundamental business value, not sentiment, is your most dependable anchor in making investment decisions;
- Long-term thinking is most effective (essential, even) when the short term is especially opaque;
- Prepared, cool-headed and disciplined investors reap greater rewards in times of panic;
- Remaining invested through the crisis provides the best potential for earning the best returns during the recovery; and
- At the peak of pessimism and minimum visibility, markets tend to punish cyclical companies that will ultimately emerge intact similarly to cyclical companies which could require capital injections to survive. But this creates material long-term mispricing in the first group, which sets the stage for outsize returns for the analytical investor.
Markets, we know, tend to discount prices well in advance of poor expectations materialising — but they also recover well in advance of economic and business conditions hitting the bottom. Using bottom-up valuations as the foundation always proves to be the best leveller in terms of removing timing, emotional or behavioural fears.
Over the next few weeks, global Covid-19 deaths are expected to rise before they start declining, just as asset prices will eventually stabilise before trending higher.
In an update on Monday, health minister Zweli Mkhize encouraged everyone to "stay calm, focused and courageous". This is advice equally powerful and applicable to the way we respond to our hard-earned savings during this crisis.
- Govender is co-founder and CIO of Perpetua Investment Managers