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Published: 16/03/2020

During the past month, financial markets have experienced extreme levels of volatility and disorderly price action. This was triggered by a unique combination of factors starting with the spread of the Coronavirus outside of China and the WHO’s declaration last week that COVID-19 is now a global pandemic. These fears were then coupled with an oil price shock, together with a perceived lack of coordination in the response from Governments and Central Banks that further unsettled markets.

Over the past three weeks equity markets have fallen by over 30%. The speed of the move has also impacted virtually every other asset class including gold, property, bonds and many alternative investments. Market sentiment is therefore already at extreme levels suggesting that there is a very large amount of bad news now priced into markets.

That is not to say that markets cannot fall further; given their disorderly nature at present, it is quite possible that we may see even more extreme moves before the current volatility reduces. However, we are reaching the point where such price action is driven by irrational fear, rather than a rational consideration of the facts. As we have already seen, any good news now has the potential to drive sharp relief rallies in markets.

It is possible that some investors manage to successfully ‘trade’ this market, but the danger for most is that they turn a paper loss into an actual loss. I am reminded of the words of the great investor Benjamin Graham, who said:

“Price fluctuations provide the true investor with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market”

These are particularly apposite words for the current circumstances. While sharp downward moves in equity markets are extremely uncomfortable, they are notoriously difficult to predict and we reiterate that during such periods of heightened volatility it is critically important that investors keep well-grounded in the longer term view, so as to avoid getting caught out by sudden market movements. Such periods of turbulence often provide the best opportunities for investors to build portfolio long term positions at good entry prices.

We are reviewing our strategies continuously, but given the speed of the moves being experienced in recent weeks, we believe there is little to be gained from selling at these levels and are looking for opportunities to take advantage of market weakness to build quality positions over the coming weeks. We will update you periodically as developments emerge.

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.