While the source of the latest market crash was unexpected there is nothing unprecedented about the reaction, according to Rathbones multi-asset head David Coombs, who said it bears similarities to previous crises.
The spread of the Wuhan coronavirus beyond China has seen authorities around the world scrambling to enact measures to prevent mass infection and relieve the impact on their healthcare systems.
As a result, many countries and economies have been affected by the impact on supply chains and self-isolation measures designed to protect the general public.
And this has been felt in markets, with the developed markets-focused MSCI World index down by 25.62 per cent (n sterling terms) in the past month, as the below chart shows.
Performance of index over one month
Source: FE Analytics
Nevertheless, investors should not believe that this type of crisis is anything new.
Coombs, who oversees the Rathbones multi-asset portfolios including the £670.4m Rathbone Strategic Growth Portfolio, said that while the severity of the coronavirus impact on markets might have surprised, it fits a previous pattern of shocks to markets.
“It’s not unprecedented,” said Coombs (pictured). “Unfortunately, I’m old enough to have worked right back to the mid-1980s and I’ve seen a number of global market crashes. So, in terms of market movements, these aren’t unprecedented at all.
“Obviously a pandemic is unprecedented. But every time there is a big market stress event [but] whether its ’87 or ’95 or ’98 or 2000 or 2008, market reactions are pretty much similar.
“The cause is always different but ultimately they impact on confidence, it pushes economies into recession and that tends to often cause problems with bad loans and poor credit and you get these very deep recessions and I suspect that’s where we’re going again.”
Indeed, a number of market commentators have begun to anticipate a recession as an already slowing global economy sees productivity grinds to a halt amid social exclusion measures and supply chain disruptions.
Seasoned investors should be able to recognise the current market shock for what it is and position themselves accordingly, said Coombs.
“If the coronavirus continues for six-to-nine months then it’ll almost become unprecedented,” he said. “But [if you’re] managing portfolios day-to-day this is not unprecedented at all, it always feels horrendous, uncomfortable, difficult and stressful.
“You never quite know what you when it’s going to come out of it, sometimes it’s a V-shape [recovery], sometimes it’s a U-shape and sometimes it’s an extended U-shape – I don’t know what this is. And that’s what the markets are struggling to price-in at the moment.”
As such, the Rathbone Strategic Growth Portfolio manager said that he has been taking more risk out of the portfolios and instead buying put options, sovereign bonds, cash and gold to defend against the market sell-off.
“I’ve been buying US Treasuries – fully expecting to lose money on them in the next three months,” he said. “[There are] US dollars in the portfolio. It’s the world reserve currency and if things were to get worse from here, I’m making sure I’ve got plenty of liquidity. And there’s nothing more liquid than the US dollar.”
Coombs has also been adding gold to the portfolios, although its behaviour has confused him more recently.
Nevertheless, the Rathbones multi-asset manager said that the actions taken by central banks and governments would likely have an inflationary impact on markets for which gold would be a very good hedge.
“Given interest rates are so low, this should be a positive environment for gold and I think interest rates will have to stay quite low for some time,” he said.
“We think gold is quite attractive at these levels, but there is no doubt there is some odd trading going on in the last few days – which is obviously a technical term for saying ‘I don’t fully understand’.
“You can’t say it’s mispriced because it has no income, it is what it is.
Performance of Bloomberg Gold Sub vs MSCI World in US dollars in March
Source: FE Analytics
“But given the uncertainty of the next 6-12 months and the fact that we’re going to have very negative interest rates, gold is a good strategic diversifier in the portfolio. And there aren’t too many of those around.”
Longer term, Coombs said his structural view of markets remains little-changed by the coronavirus pandemic and he will continue to invest in what he considers the industries of tomorrow.
“I think there will be a review of supply chains and all sorts of globalised industries – although the world tends to have quite short memories,” he said.
“In terms of what we’re looking at – more environmental and social consumer habits, medtech – many of these drivers of change we’re not shifting. The changes have really been in the overall risk levels.
“The long-term drivers remain the same but clearly they’re on pause. There’s going to be a lot of financial damage done in the next three-to-six months.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over the past three years, the four FE fundinfo Crown-rated Rathbone Strategic Growth Portfolio has made a 1.94 per cent loss compared with a 14.8 per cent gain for the UK Consumer Price Index + 3 per cent benchmark. The fund has an ongoing charges figure (OCF) of 0.62 per cent.