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Published: 24/03/2020

It is difficult to believe how much the world has changed in just three weeks.

As China battled, seemingly successfully, to contain the virus in February, outbreaks started to grow in a handful of other centres. Close to the epicentre in Asia the response was quick and relatively effective but western countries were too slow to realise the scale of the crisis.

Northern Italy was struck first and a lack of early testing meant that the scale of the epidemic was not fully recognised until it was too late. With by far the oldest average population in Europe, the health service in Italy has quickly become overwhelmed and the death toll has climbed rapidly, now surpassing China.

The virus is spreading at speed across Europe and North America. Initially the response of Governments and Central Banks was insufficient, but in only a handful of days that has changed. Whole countries have been placed in near complete lockdown and the combined monetary and fiscal response is on a level never seen before, helping to stabilise markets.

COVID-19 is above all a human tragedy that has exposed in stark contrast both the best and worst aspects of human nature.

The response from financial markets has been brutal and astonishingly fast. Equity markets have fallen over 35% in a straight drop with some stocks close to reaching their 2008/09 lows. The oil price fell to $20 a barrel this week; this is now approaching a 60% fall, with high yield bonds and property also being hit hard.

Perhaps most surprising has been the impact on the traditionally ‘safer’ asset classes. The market for investment grade bonds virtually stopped and many high quality short term bonds that would normally be regarded as very low risk fell by around 10%. In the panic, even Gold and finally Government bonds sold off heavily as traders raised cash from anywhere to fund margin calls.

The markets have been almost dysfunctional with increasingly wide bid-offer spreads and few if any buyers. We have just witnessed the worst market crash in modern history eclipsing both 1987 and even 1929. Despite relatively defensive positioning, a traditionally balanced investment portfolio will have fallen in value by circa 20%. Such a move is unprecedented in modern times and represents close to a 4 standard deviation event squeezed into just three weeks.

It is difficult to call the bottom of any financial crash, but certainly there are now extraordinary buying opportunities in almost every asset class.

On the current trajectory we must expect (and the market has priced in) the spread of the virus to get dramatically worse before it starts to improve. No amount of fiscal or monetary stimulus can offset this while the news flow continues to worsen every day. However, the scale of fiscal and monetary intervention now unveiled makes it hard for markets to keep on falling at the same pace. Like compressing an enormous spring under a weight of fear, panic and bad news; it will only take one significant and genuine positive surprise for that spring to release. When it does it will be impossible to find a seller.

What might a positive surprise look like? It is unlikely to be stimulus based. We need to begin to feel there is a real likelihood of beating this virus. Certainly if we see tangible positive results from medical tests either of anti-viral treatments or vaccine trials, the picture will change dramatically. Numerous trials are in progress all over the world, so a surprise in this regard could come at any time.

One extraordinary fact is that the best performing market in the world this year has been China! As soon as it was clear from the data that China was winning the battle against COVID-19, its markets began to recover dramatically. The same is likely elsewhere. Italy could perhaps provide the first indications of relative improvement, with containment measures having been in place the longest, although countries that moved faster to introduce restrictions may start to show earlier signs of improvement; it is possible that the rates of change may begin to alleviate within two weeks.

We must expect to see further difficult weeks ahead with volatility staying close to all-time highs but, in our view, this is the time to consider adding to long term investments that are likely to succeed in the post-COVID-19 world. To do so, one needs to actually increase risk at a time when everyone else is reducing theirs. This is likely to mean continued volatility in investment portfolios in the short term, but this is necessary to be positioned ahead of the rally when it eventually arrives.

We reiterate that during periods of high volatility it is critically important that investors keep well-grounded in the longer term view. The current crisis will pass; it is a matter of when, not if and long term investors should consider how best to be positioned ahead of this. Such turning points tend to occur when distress is at its greatest.

Finally, we urge all investors to take sensible precautions in accordance with government advice to protect themselves and to reduce the spread of COVID-19 in the community.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.