The market turmoil wrought by the Covid-19 pandemic is unprecedented. Never before have global markets dropped so precipitously, so quickly.
At the sell-off peak, there was nowhere to hide as even gold took a hit. When the dust finally settled, the world had entered the fastest bear market in history. And with no end in sight as governments battle to contain the outbreak and mitigate the human cost, uncertainty and sentiment continue to drive market volatility.
"While the desire to … move all assets to cash is an understandable response … it is unlikely to be in an investor’s best interests," says Eugene Visagie, client portfolio manager at Morningstar Investment Management SA.
But as many investors take stock of their losses, speculators and traders are looking to exploit the opportunities that accompany a market crisis.
"Volatility is marvellous because, for astute investors who pay enough attention and capitalise at the right time, there is money to be made," says Daniel Kibel, director of CM Trading.
"While volatility brings much higher risk, the returns are potentially enormous."
A case in point was the S&P 500’s schizophrenic movements in March. The index lost 9.51% on Black Thursday, March 12, only to post its biggest one-day gain since 2008 the next day, rising by 9.28%. It then plunged 11.98% three days later.
"While some investors have capitalised and made fortunes, like many who shorted the market, others have made significant losses. However, cutting your losses and running is not the best approach," says Kibel.
But it is not just traders and speculators for whom opportunity beckons. Long-term investors should also look to benefit from the market rebound that inevitably follows a black swan event.
Investors and asset managers have made significant returns during the rebounds following other financial crises.
"Investors who don’t panic often find their best buying opportunities following a large sell-off," says Greg Flash, chief investment officer at Cinnabar Investment Management.
Kibel says: "While investors need to be aware of the risks, [they] can maintain control by limiting the amount of money they put in, knowing that this is a time when the scales could tip in either direction."
Timm Reutter, senior wealth manager at Geneva Management Group, says: "For those below their strategic equity allocation, the time to buy is now, but be sensible. Avoid investing lump sums. Any liquidity should be invested over time. A sensible approach is staggering investments over the next three to six months."
There was also growing market consensus among asset managers that pre-coronavirus valuations in the US were too expensive, according to Flash.
"Expectations were that a point of reckoning would eventually come as growth slowed, or the Fed returned to a rate hiking cycle. The Covid-19 market crash helped trigger this rerating, albeit far beyond previous predictions."
And when markets panic, investors tend to sell at a price based on fear and uncertainty, not on valuations. "That’s when bargains abound," adds Flash.
When picking through the carnage for winners, Reutter cautions investors against drilling too deep.
"This approach requires specific expertise. Rather base your decision on decisive macro factors and look at company valuations in aggregate."
Reutter also recommends include taking a view of market profit trajectories to form opinions about whether valuations look cheap or expensive, and avoiding companies with high gearing.
"Use this approach to build a diversified portfolio of select quality companies — don’t make concentrated bets. Otherwise, be pragmatic and buy the market through indexes."
And even if valuations seem attractive, investors who enter the market now should expect one or two more market shakeouts.
"No one can truthfully pick the bottom, except those who occasionally get lucky, as an extended US shutdown or a second infection peak could trigger another 10%-20% loss in markets," says Reutter.
Flash adds: "It is important for a long-term investor to have a strategic asset allocation around which managers can make tactical decisions within bands to control a portfolio’s overall risk structure.
"During periods of extreme market fluctuations, managers can tilt within their tactical allocation bands to reflect any longer-term changes to the market caused by the volatility."
Visagie says: "Investors should stay focused on their long-term financial goals, remain calm and keep doing what they can to stick to those goals — save more and keep on investing smartly."
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