Coronavirus impact on the markets
Given the current world events and the WHO declaring the COVID-19 outbreak a pandemic, Capricorn Asset Management is sharing this information with its clients and stakeholders to assist them in making a sensible choice as to how to respond to the current situation during this time of uncertainty.
1. What we know
The coronavirus is having material effects on the global economy. All major stock markets across the globe are experiencing a significant sell-off. Although most major central banks are expected to implement rate cuts to stimulate their economies, the negative economic effects will remain evident for a couple of months. This stimulates the fear of a global recession.
2. What we don’t know
We do not know where the “bottom” will be. Our best indication will be when the number of new cases decreases or if a vaccine is developed. Until then, volatility will remain high. We are also unsure about the extent of the damage the virus is having on the economy, local and global, as the situation is still developing.
3. What is at risk
Money market funds are conservative funds and will not be impacted by the global sell-off in equities. Any invested capital is not at risk. However, the actions that local central banks may take in response to the situation (e.g. to cut lending rates), will dampen the expected return that these funds can achieve in the future.
4. What is the best action going forward
Just as this crash was impossible to forecast, in the same way, the time and magnitude of the correction (if any) is just as uncertain. However, the greatest mistake an investor can make now is to switch out based on fear as it would result in the realisation of book losses thus far incurred. More importantly, investors should consider their investment horizons and investment goals before making any short-term decisions. A similar situation was witnessed during the financial crash of 2008. The graph below shows the MSCI World Index, from 2008 to date. During the period from 30 May 2008 until 06 March 2009, the index was down around 53%. (At the moment we are faced with a 26% drop on the same index.)
We highly recommend that investors revisit their personal investment goals, and specifically consider their investment horizons (the timeframe of their planned investments). Care should be taken not to make a short-term decision on a long-term asset. While equity exposure is the source of the decrease in market value, it is only equity exposure that can repair the damage in the shortest timeframe. This will take the investor around four years to recover the lost capital. A market correction can take considerably less time.