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Investing in this time of Covid19

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We are all facing a truly unprecedented situation. The COVID-19 pandemic is affecting all of our families, businesses and way of life. We wish all our clients to take the necessary precautions as laid out by the government.

That said we also need to consider our financial well-being. Below is a note from our asset manager, Emperor, discussing the impact of the market and their portfolios.

The fallout from Covid19 has had a dramatic impact on markets. At the time of this writing, 17 March 2020, the both the Top 40 Total Return Index and the MSCI World Total Return are down in their base currencies (ZAR and USD respectively).

This fall is remarkable not only for its absolute impact but also for the speed in which it has occurred. To put this in perspective, the Top TR index reached its absolute high this year on 17 January 2020 (priced at 7968.101), it has since fallen 30% in 59 days. During the financial crises of 2008 the market reached a peak in 22 May 2008 and it took 130 days before it fell 30%. I.e. the SA market is moving at a pace of 2.5 times that of the market during the 2008 panic.

South Africa has clearly not been solely affected. The MSCI World Total Return Index reached a high this year at 12 February 2020 and has fallen 30% approximately until the date of writing this (33 days in length). That index reached a peak at 31 October 2007 and it then took 337 to fall 30%. Ie this market is moving at 10 times the pace of the 2008 financial panic.

Although these two crises are very different, it is interesting to compare them.

Finally, it’s worth noting that in the 2008 panic the SA market took 860 days from bottom until recovery (experiencing a maximum loss of 48%), the MSCI World TR Index took 1,411 days ((experiencing a maximum loss of 58%). All figures are in ZAR and USD respectively.

Emperor analysis the market using its factor building blocks. Here too the fall has been dramatic. Generally investing in a range of momentum, value, quality and stability factor stocks provides a level of diversification greater than the market (with a higher expected return). For example, we can see the different return profile of these factors by looking at their 2019 return performance:

  • Momentum up 40%
  • Quality up 16%
  • Value up 5%
  • Stability up 4%

The Emperor combined SA equity portfolio was up 20.5% in 2019 (The Top 40 TR Index was up 12%).

What’s important to note from the above is not the absolute value of the return but the disparity between the returns. This is as expected in that we would expect companies with different intrinsic characteristics to behave differently (lower correlation compared to the market).

Although it has only been a short period of time, in 2020 all these factor portfolios are down about the same amount, negative 20% (the Top 40 TR Index is down about 22% since the start of January). What this tells us is that there has been a dramatic selloff of all companies that is independent of their factor dynamics (of course some stocks have sold of more than others, this is not an individual stock assess, but an assessment of a group of stocks who share similar dynamics compared to a different group of stocks with a different set of dynamics).

Where the market goes to next and how long it takes to recover is anyone’s guess, we have no crystal ball. What we can say is the market is ignoring traditional factor metrics and we know that these factors tend to recover to long term norms with time. The key to long term investment success is a robust process, knowing your risk tolerance and having a long enough time in the market to benefit from it (as the old adage goes, “time in the market, not timing the market.”).

 

YTD

2019

Enhanced Conservative

-7.36%

14.27%

Enhanced Moderate

-9.06%

16.06%

Enhanced Balanced

-11.38%

16.75%

Enhanced Equity

-13.55%

21.41%

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Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by Shaun Krom,  Chief Investment Officer of Emperor Asset Management (Pty) Ltd as general market commentary, and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.