While some people are acting selfishly or seem unwilling to follow any government advice short of an enforced lockdown, the outbreak has finally dispelled the myth of self-reliance, although perhaps not in the stoical sense. It has laid bare the interconnectivity of the globalised economy, its reactive supply chains, complicated global logistics and capital flows, but also its inherent vulnerability.
Problems associated with global supply chains are rarely confined to a single business or industry. And it is debatable whether they’re given adequate weight whenever equity analysts consider a stock’s relative merits. The reality is that even a relatively small supply chain disruption can be amplified across the global economy.
Companies are constantly updating their risk management strategies, so it’s not as though they have been blindsided by Covid-19, but it presents unique challenges. A paper published within the Harvard Business Review following the H5N1 outbreak concluded that “a pandemic is fundamentally different from other, more traditional business continuity threats and is outside the scope of issues typically considered by continuity planners”.
That’s hardly reassuring, although it’s worth pondering whether the collective reaction to this pandemic has already opened the way for contrarian strategies. No doubt many investors will be keeping their powder dry given the unprecedented scale of the economic disruption and the prospect of mass corporate impairments through the next few months. There will also be a shake-out in the market linked to overleveraged risk assets, but sentiment will shift decisively once the infection rate plateaus and then starts to recede in Europe and the US.
The UK benchmark index is now at levels not seen since August 2009, with the risks still firmly weighted to the downside, but at least HM Treasury moved quickly to provide monetary and fiscal support, delivering a much-needed injection of liquidity.
And while income prospects may have diminished, those blue-chips intent on maintaining their dollar-denominated dividends will benefit from sterling weakness against the dollar, a partial reflection of the greenback’s inverse relationship with the oil price. While Royal Dutch Shell (RDSB) has shelved the next leg of its share buyback programme, a 15 per cent yield is still worth mulling over.
Behavioural finance suggests that when investors disregard or downplay the potential for loss, they effectively abandon rational thinking. It seems possible, given the duration of the bull market, that many investors have been booking profits over the past couple of weeks, but you also suspect there were as many investors panicked into action.
Others would have been liquidating positions to build a war chest, providing enhanced optionality, including the ability to secure quality stocks in anticipation of the eventual upward leg of the cycle. This chimes with the latest survey of fund managers by Bank of America Merrill Lynch, which showed the fourth-largest monthly rise in cash in the survey’s history.
There is no herd immunity to markets in freefall, but when we come out the other end – and rest assured we will – there will be no shortage of solid buys on offer. For now, though, we all realise that calling the market is a fool’s errand, particularly under existing circumstances. It may eventually pay to follow a simple dollar-cost averaging strategy, whereby you divide the total amount you’re willing to invest in a given stock across several tranches, which has the effect of reducing the impact of volatility.
The strategy is particularly effective during bear markets as it enables you to strike at low points of the cycle when the bulk of investors are fearful. It doesn’t render your portfolio impervious to market shocks, but it provides a degree of insulation as you cast around for favoured stocks that may have seemed prohibitively expensive only a few short weeks ago. It enables you – in so far as it’s possible – to act dispassionately, devoid of psychological bias. This isn’t the time to let your emotions get the better of you – fortunes are made when markets are in disarray.
