Dear long-term investor:
We write to you today in reference to the current market situation and reaction to the events over the last few weeks post the outbreak of the coronavirus. In this article, we would like to highlight our thoughts where we contemplate possible future scenarios.
We see three possible scenarios:
With all the various measures being adopted, the countries manage to contain the virus and no major bankruptcies occur over the coming weeks/months. In this case, the stock markets will react well even if the economy is partially stopped for a few weeks and this extraordinary situation would be seen as a buying opportunity at the end.
Though the countries manage to contain the virus, we see some bankruptcies over the coming months of some large companies in the airline, tourism or oil sector. In this case, we would see a lot of volatility in the equity and fixed income markets. Corporate bonds could fall a lot (especially in this extraordinary situation with such low rates) and the equity market would continue to show a lot of volatility but would rise in the medium-term.
In the final scenario, we would see countries not being in a position to contain the virus soon, which would lead to heightened panic, bankruptcies and a serious financial crisis. In this case, corporate bonds would drop severely and we would see permanent capital losses on fixed income. In addition to the bankruptcy of some companies and the panic that reduces the demand for such bonds and affects valuation, we could see high levels of inflation to alleviate the large volume of debt in many developed economies. Fixed income does not protect the saver against inflation and many savers would suffer significant permanent losses in purchasing power.
Equities on the other hand, will protect the saver against increases in inflation. In this third case, there would be a lot of volatility in the equity market. We would most likely see strong short-term declines and medium / long-term rises. Bear in mind that companies do protect their owners against increases in inflation as the prices of their products and services would rise in response to increases in price levels.
In these times of uncertainty, it is worth considering the various possible scenarios. Although short-term volatility may be very high, once again, it is important to remember that the money you do not require in the short-term, is safest in real assets in the long-term such as equity funds, real estate or raw materials. Money held in cash guarantees a loss of purchasing power over the medium to long-term.
The Vadevalor Team