When the market bottoms, it’s time to buy again

The fast-moving and unknown variables of coronavirus (COVID-19) caught everyone off guard.

Sport shut down. Restaurants are now takeaway outlets at best. Debate about school closures continue to divide Australian parents. Employers are struggling to keep businesses open, while job losses have lengthened the lines outside Centrelink.

And then there’s the markets.

Markets continue to decline. Aussie stocks have lost over half a trillion dollars in a month. It is the fifth consecutive week of falls, having plunged 36 per cent in this time and wiping out seven and a half years of gains.

“That's pretty much broken all records outside of the 1987 stock market crash in terms of the speed of the fall,” Burman Invest chief investment officer Julia Lee told news.com.

The crash is harder to take as only a couple of months ago we were talking about market peaks. The S&P/ASX 200 index peaked at 7,162 on 20 February this year.

IG Markets analyst Kyle Rodda believes that worst case scenario would see the market lose half this value.

Rodda said the worst that could happen is the pandemic “sends the world into deep recession, and the issues in oil markets spark a crisis in US corporate credit markets as feared.”

The following graph illustrates IG Markets' fears, along with those of Citi.

Of the oil market, Seema Shah, chief strategist at Principal Global Investors says, “With COVID-19 fears weighing heavily on oil prices, OPEC and Russia met on 6 March to discuss output cuts in continuation of their price-defence strategy.

However, Russian opposition led Saudi Arabia to set itself on a market-share defence strategy, enacting a new oil price war and, in turn, compounding market and economic fears.

As Brent and WTI crude oil prices dropped some 25% in a single session, energy companies quickly faced struggles to remain cash-flow positive, triggering growing threats of job losses and bankruptcies.”

Put simply, a slump in crude due to COVID-19 was compounded by an escalating price war between Russia and Saudi Arabia.

Even market bellwethers are struggling

According to PwC, publicly traded asset managers have seen their share prices fall 20% to 30% or more since their February market highs.

Asset managers are largely considered the bellwethers of financial markets, given how closely revenues are tied to the capital markets. However, as PwC highlights, “asset management firms know how to handle market volatility and assess market-related risks better than non-financial firms”.

Those managers have to be mindful of how they deal with clients. Best practice should be paramount as market volatility increases for what could be an indeterminate amount of time.

PwC urges asset managers to “use historical context to your advantage when speaking with clients, staff and the public. Consider re-evaluating your enterprise risk management framework to address the new and enhanced risks that COVID-19 is creating, such as technology (e.g. IT capacity, stability and connectivity as well as cybersecurity), operational (e.g. workforce planning, changes to internal controls), and reputational risks (e.g. communication to key stakeholders).”

How can investors and finance professionals work through this time?

As Finfeed journalist Trevor Hoey pointed out in a recent article, “The global financial crisis/great recession that occurred between 2007 and 2009 was a drastic event, but as the world worked through it, the reasons became very obvious, the required response at Central Bank, government and business levels was very clear and investors could gain a feel for the financial impact on stocks and with reasonable confidence predict the timing of a recovery to business as usual.”

This time it’s different. Right now, it’s an even more challenging time to be an investor.

However as Hoey also pointed out, “the drill bits are still turning, the assay results are still coming to hand, the medical trials are still progressing and the regulatory approvals are still in the pipeline.”

As with the GFC, government action will have a large role to play in the global economic recovery and in positive sentiment coming back to the market.

Seema Shah says, “While policymakers can’t stop the spread of coronavirus, they still have an important role to play. The action from the Fed on 12 March and 15 March were less economic stimulus, and more an injection of liquidity to prevent capital markets from shutting down on themselves. The Fed’s intent was to prevent a supply shock via coronavirus from mutating into an illiquidity shock that could ultimately evolve into an insolvency shock.

“Comparisons to the GFC are inevitable, but that there are many clear differences. The GFC took 429 business days to play out, while the current shock has only been in motion for 24 business days. Could it extend itself to a multi-year drawdown?

"While the GFC was driven by an unravelling of significant imbalances which typically tends to be drawn-out, this current market selloff has been primarily triggered by the spread of coronavirus.”

There is hope says Shah.

“Although a potentially devastating pandemic, the shock is likely only temporary. Once daily infection rates have peaked, financial markets will benefit from aggressively easy monetary conditions, sizeable fiscal stimulus, low oil prices, pent-up demand, and cheap valuations.”

Todd Jablonski, Chief Investment Officer at Principal Global Investors says the bleeding will stop.

“We believe global markets begin to recover when investors expect an improving COVID-19 situation hallmarked by reduced infections and manageable demands for health care resources.

“While we initially expected to potentially see stability in the markets through any combination of coordinated Central Bank monetary response, an announcement of fiscal stimulus, or a firming in high-frequency Asian economic data; we’ve seen all of this and it has yet to give a floor to investors and their risk appetite.

Yet as Binay Chandgothia, Portfolio Manager and Head of Asia says, “While the latest wave of worry is understandably concerning, closely tracking the indicators helps us understand what is happening through the market volatility, enabling us to capture opportunities as we ride out this crisis.”

When the market does inevitably bottom out there will be opportunities.

Hedge-fund manager and founder of Appaloosa Management David Tepper, whose net worth is estimated to be US$12 billion, told CNBC, “There’s nothing wrong with nibbling (at stocks) here,” referring to stocks that have fallen at an unprecedented rate.

“It might be time to buy a little, and that means a little,” cautioning the market could still fall by another 10% or 15% and there will be further pain for investors.

The bottom line is investors should be prudent in identifying stocks in the wake of COVID-19. However, they should be confident that once the market has bottomed, it will come back.

The timeline on this depends on how quickly world governments can stabilise the markets, but during this time it is important to stay calm and make level-headed decisions.

Here are some wise words from Berkshire Hathaway billionaire Warren Buffett:

As Buffett says, “This is a terrible thing to be happening, but it won’t stop the progress of the world.”