Think Big: One expert’s tips on how to invest in a pandemic
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It’s been a historic week on global stock markets — and not in a good way.
As the coronavirus spreads to new countries and advanced economies mobilise for a health crisis, investors have been gripped by levels of fear and uncertainty not seen in years.
Across five straight losing sessions, the ASX200 has posted a cumulative loss of more than 7 per cent.
For a performance that bad, you’d have to go back to August 2011 — when Greece’s debt problems rattled markets just two years removed from the financial crisis.
It’s been a similar story on the Small Ords Index, which also fell by more than 7 per cent. And local investors are bracing for more chaos today after US markets plunged again overnight.
The falls have shaken up what has been a decade-long bull market, defined by steady growth with low inflation as central banks keep rates at or near record lows.
So for a Black Swan event like COVID-19, how should investors react? Buy gold? Hide all their cash under the bed?
To get some extra perspective it helps to talk to the pros, and this week Stockhead caught up with James Whelan, investment manager at specialist advisory firm VFS Group.
Whelan said the VFS team started making some virus-related tweaks to their portfolio as far back as January, when early reports began filtering through of a viral outbreak stemming from the central Chinese city of Wuhan.
“The thing we noticed about Wuhan was its location — you’ve got an infection which started in a central hub that’s connected to the high-speed rail network,” Whelan said.
“That’s when we started putting on some selective shorts in the options market, just buying puts and limiting our risk.”
However, the fund has refrained from placing broader short bets against major stock indexes.
As an example of how difficult the market is to time amid the unpredictability of a health crisis, Whelan highlighted an interesting pattern in the lead-up to this week’s selloff.
“If you go back over the past month or so, each week there’s been a bit of a panic and then the dips got bought and the shorts got cleaned out,” he said.
“And this week was the week where it just didn’t get saved. So we don’t try and pick it or second-guess what the market’s doing. We’d have missed out on three weeks of mini-rallies if we’d been out of the market.”
Now that the bears are well and truly in control, Whelan said the group had played a straight bat with more conventional risk management strategies. The cash weighting has gone up as has the exposure to gold.
“If the gold allocation is 5-10 per cent, then I’ve told the team I want that up to 15-20 per cent, depending on the client,” he said.
And with some extra risk buffers in place, the next challenge is to prepare for the million-dollar question; where this thing goes next.
“I don’t think (the worry) is overblown,” Whelan said. “We saw Trump’s speech where he said influenza kills up to 69,000 people each year. But it’s like — OK, we know that number. We know how to treat it, how to vaccinate it and the mortality rates.”
“All of those are ‘known knowns’ and we’re right across it. This has got so many ‘known unknowns’ that you can’t dismiss it the way some people have been dismissing it.”
Whelan said before the threat of a global pandemic, 2020 was actually shaping up as a solid year for growth.
“Emerging markets were back on the scene, copper was rallying, oil was back — everything looked in unison for the synchronised global recovery.”
Now, the rug has been pulled out. And from a risk management standpoint, the question is whether the crisis will begin cramping liquidity in other asset classes and create a negative snowball effect.
Historically high levels of corporate debt have often been cited in recent years as one lingering risk that could be exacerbated by an unexpected catalyst.
But with rates anchored at record lows, Whelan is less worried about corporate debt than the emergence of economic cracks at the state level.
For countries like Italy, which is dealing with a corona crisis and already has a public debt-to-GDP ratio well above 100 per cent “they can’t afford this”, Whelan says.
“That’s where this is the perfect storm, and that’s why I think this correction could easily be bigger than some people anticipate.”
Before investors run for the hills, drastic market events (whether good or bad) still throw up opportunities.
And for Whelan, he sees US Treasuries (denominated in US dollars) and gold as something of an investing “free kick” in the current climate.
In the event COVID-19 becomes a global pandemic, safe-haven assets will find demand. But if its eventually contained, the current bout of disruption means the global economy will require a kickstart to get things moving again.
“If we go over the crest of this hill and it starts to get resolved, you’re going to need to re-stimulate the global economy,” Whelan said.
“How do you do that? Cheaper money and lower rates. What asset does that benefit? Treasuries because yields come off, and gold because there’s nowhere else to put your money.”
“So in a risk-off event these asset classes go up — as they have done — and in a risk-on event they’ll keep going up.”