Fear of COVID-19 pandemic inflamed a global sell-off across financial markets in March 2020. Investors got years of gains wiped out in just a matter of days. No asset seems to be immune from this wave of panic selling. Is it time for buying yet, or selling is a wiser option? How should the average investor manage his or her portfolio?
Financial markets have been sailing relatively smooth waters for over nine years. A mix of ultra-accommodative policies put in place by Central banks worldwide and a slow, but steady, global economic growth fuelled the longest ever financial expansion of the last 100 years.
Fear the unexpected?
However, no economist or financial analyst could foresee the coming pandemic outbreak. Statistics call these event “Black Swans”. Most of the investors usually don’t even take them into account, as the likelihood that they will actually happen is negligible. Unfortunately, statistics are almost always wrong, and the lack of awareness of what is about to come translates soon into fear.
Fear is the first keyword to focus on. And it opposes to Hope. These days news are overflowing all media channels, generating high levels of uncertainty. These are the times when emotions and feelings prevail. Human nature reveals as the worst enemy of decision-making processes. The daily increasing death count, new countries going into complete lockdowns and new outbreaks affect the possibility of taking rational decisions significantly.
What can we expect?
This Coronavirus sell-off already outpaced what we witnessed during the Great Financial Crisis in 2008. To be realistic, a quick recovery is very unlikely. As an additional comparison, in 2008, it took about one year for prices to reach the bottom. There comes the importance of managing our own emotions in such troubled times and sticking to rational thinking.
On April 2nd, the number of COVID-19 cases crossed one million worldwide. A ten-fold increase in March alone, what should we expect in one month from now? What will be in the impact on global GDP of this pandemic? During the worst recession since 1929, the US GDP fell at an annualized rate of 6.3% for three quarters, before starting its recovery. Early forecasts already see the US GDP fall around 20-30% in Q2 2020 alone. That’s precisely how a Black Swan looks like.
How to protect your portfolio?
If the recession or the depression that will come as a consequence of this pandemic is still in its early stage, it’ probably too early to consider buying stocks. History teaches us that in times like these, investors favour safer assets like bonds, gold or cash. This time the scenario could be slightly altered.
Bonds are not as safe as they have historically been.
Central banks inflated the valuation significantly over ten years of liquidity injections. Trillions of Dollar worth of fixed income instruments already trade with negative interest yields. That means that instead of producing income, they erode capital over time. Valuations are even more stretched when considering that corporates and governments have a much higher level of debt today than before. Low-interest rates should have encouraged a deleveraging, instead just boosted new debt-issuances. Moral-hazard is always the root of the worst crisis. On top of that, unprecedented liquidity injections will have consequences on inflation in the long-term eventually. Longer-dated bonds (the only not yet trading at negative rates) should underperform under such assumptions.
The golden metal is undoubtedly the safest asset, yet it underperformed in these early stages. The severe broad sell-off across all the global markets forced investors to raise cash as quickly as possible to cover losses. Also, low expectations of inflation coming soon are not urging investors to hedge from that risk. Nonetheless, gold could be a solid option in the long term, when inflation concerns mount.Nowadays, there are plenty of options to invest in gold. The most popular investment vehicles are the ETFs, exchange-traded funds. Most of them are backed by physical gold, which means that it’s the closest type of investment to owning real gold bullions, but you can liquidate with far fewer hurdles. One of the most reliable gold ETFs is the SPDR Gold Trust (GLD) traded on the US stock market.
Cash is the only king.
In times of turmoil, those that hold cash usually are those able to protect their portfolio better and can promptly catch the best opportunities when the right time comes. In particular, the Dollar is by far one of the best-performing assets among the legacy asset classes. For sure liquidity, injections are deemed to devaluate the currencies, but this will only materialize in the medium or long-term. For now, investors seek to reduce the volatility and the risk of their holding, and cash is by far the best option.
A brand new (digital) asset class
Cryptocurrencies are probably the asset class with the best risk/reward profile for the future. The broad concept of crypto was designed precisely for periods like this. This Coronavirus market crash will be the real stress test of its underlying philosophy. Moreover, crypto teams are well-positioned to continue their operations remotely with no discontinuities.
Since February, the correlation between Bitcoin and stocks has increased, and it’s now relatively high. Nevertheless, the value sits currently at around 0.1, which is still a relatively low correlation compared to other traditional assets classes. The notion of crypto as a hedge to a crisis of the legacy system seems to be not happening just yet. After all, that is reasonable as cryptocurrencies are not a broadly acknowledged asset class for investors.
Rethink your investment strategy
Exceptional opportunities will also arise among stocks. Some business sectors like technology, robotics and biomedical will likely be relatively less impacted by this economic storm and will recover much quicker. It’s just that it feels like the time is not right yet for buying. Uncertainty will bring more volatility, and that poses a risk for any portfolio. Of course, volatility also bears short term opportunities, but emotions often prevent from taking the best of them. If you are willing to allocate a part of your portfolio to tactic trades, you could use a trading bot. Some of those available on the market are very user-friendly yet effective. Coinrule is a great example.
In general, de-risking is the main priority for every investor at the moment. Even a broad diversification can be less effective in times of higher correlation to reduce the risk. The new global economic scenario requires a new assessment of the risk of your portfolio and an in-depth evaluation of the positioning in the months to come. Just like in any aspect of our daily life, patience is a virtue.
Gabriele is a Design-Driven Entrepreneur. With over 15 years’ experience within FINTECH, Telco, Science, BANKING, he has operated in a range of Innovation Management roles around 5 countries – Finland, UK, USA, Hungary, Italy – working for UBS Bank, Nokia, NHS, Vodafone, IBM, WPP, Lloyds Bank, etc. Gabriele holds a BSc/MSc from the Polytechnic of Milan and took part in Executive Business programmes at the LSE and Harvard University. He is a Mentor at Google Launchpad, StartupBootCamp and Virgin Startups. From 2018 he is Founder & CEO of Coinrule – a smart assistant for crypto currency trading.
Ruben Cisternino has been working in Financial Markets for 7 years in Asset Management and Brokerage Firms. Skills in Financial Modelling, Business development, and Trading. Investor and Trader, available for Advisory.
In the recent years, I started to study and research Cryptocurrencies and Blockchain Technology and I could understand how many powerful and wide implementations this can have on the world of Finance and in general on our daily life. Ratings and reviews reflect only his personal opinions and are not to be considered financial advice.Passionate and critic about financial markets, focused on innovation, sustainability and blockchain.
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