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Just sit quietly

True, the answer depends on where we are in the helter-skelter trip from peak to trough and – almost by definition – we cannot know that. However, the table may help. It shows the scale and the duration of descent in the five really savage corrections that UK equities have seen in the 58 years the FTSE All-Share index has been around.

Immediately, one bright spot shines out – that really deep drops rarely come around; on average, once every 12 years, but that also indicates one is due about now.

From peaks to troughs
PeakTrough% changeDuration (months)
Jan-69176.7Jun-70121.9-31.018
May-72224.2Dec-7465.3-70.931
Jul-871,200.1Nov-87827.9-31.04
Dec-993,146.7Mar-031,747.6-44.540
Jul-073,414.8Mar-091,902.0-44.322
Dec-194,196.5Mar-203,369.0-19.72
Source: FTSE All-Share index; all data based on end-month values

On past form, a savage shock also means a drop from peak to trough of at least 30 per cent. So, assuming the current shock is as mild as ‘savage’ gets, then, with the All-Share index at 3,370, we have already fallen two-thirds of the way, with the floor at around 2,900. For those of an apocalyptic inclination, the slaughter has barely begun and the All-Share will bottom out at around 1,250 if covid-19 ushers in another 1973-74, although I hardly think we’re in a comparable situation.

This prompts the related question, what sort global recession are we heading for? Two factors stand out, one of which is unfamiliar, the other unique. The unfamiliar factor is that 2020’s recession will be driven by the economy’s supply-side failures as business – both manufacturing and services – becomes increasingly disrupted. Of course, this has repercussions on demand, but a supply-side recession would be in sharp contrast to the depression of 2008-09 where the US housing market collapsed under the weight of its financial excesses, resulting in a loss of wealth that strangled demand.

If 2020’s supply-side recession has business failure at its core, that could mean higher inflation as bottlenecks in production and distribution lead to shortages. But it should also mean a quick recovery since the financial system remains intact to get commerce up and running again.

However, there is also China, today’s unique factor because never before has China had the heft to lead the world into recession. As elsewhere, China’s slow-down – technically, it may avoid a recession – will be led by the supply side. But the fear is this will expose the weaknesses in the nation’s over-leveraged financial system – the vast quantities of dud loans on under-used (or unused) capital projects. These have been known about for years, but they have yet to run into a liquidity shortage too severe to evade.

That could be about to change, with the consequence that global recession with China playing the deadweight will be harder to stop unless somehow more international co-operation than has been evident in the Trump era manifests itself.

Combine this with a novel virus whose danger rests as much in how efficiently its spread is countered as in its own virulence and it is easy to imagine a fear factor capable of dealing a savage, but short, shock; 40 per cent off the All-Share’s peak – taking it to 2,500 – wouldn’t surprise me.

How equity investors cope with that depends on each one’s stomach for book losses, investment horizon and diversification in other assets. Clearly, the smaller the appetite, the shorter the horizon and the less the diversification, the more sensible it is to get out even now.

For others, thoughts will turn to when to buy the crash. It’s all very well to quote the clichés about buying when the blood’s in the streets. That’s of little help since it tells us nothing about how much more blood might flow. You gain nothing from buying a cheap stock if it’s twice as cheap in a month’s time.

The challenge is best tackled on a stock-by-stock basis using sensible valuations as a reference. For example, inputting various stocks into Bearbull’s valuation spreadsheets, I find that shares in Hollywood Bowl (BOWL) sell at 12 per cent below value at 202p; for Vesuvius (VSVS), the discount is 24 per cent at 379p and for Topps Tiles (TPT) it is 50 per cent at 48p. Meanwhile, shares in Qinetiq (QQ.) are still expensive at 318p (6 per cent above value) even though they are 18 per cent off their top and Diageo (DGE) shares are 23 per cent above value at £25.84 even though they are down 29 per cent.

Clearly there is more to it than that. But the aim is to have a reference point that is both sensible and remote from the distracting hurly-burly of markets populated by people who are incapable of sitting quietly.