Covid-19 financial market crash: Assets where investors can find refuge

The Covid-19 pandemic has thrown global financial markets into an unexpected tailspin, causing volatile daily swings and making it difficult to find a safe store for money.

In SA, the JSE all-share index has lost about 22% so far this year. US and Asia-Pacific markets have recorded similar losses in recent weeks. Financial markets are in turmoil because the impact of Covid-19 and lockdowns across many sectors of the economy, which have been ordered by governments to tackle the spread of the coronavirus, on global economic growth and unemployment is largely unknown and yet to be audited. 

The meltdown of financial markets in recent weeks is nothing like what market watchers have seen before. Recent crashes were mostly sector-specific: The dot-com bubble burst of the early 2000s was about technology-related shares, and the banking system and shares were at the centre of the 2007/8 global financial crisis. Meanwhile, Covid-19 has hit many sectors including retail (mainly sellers of clothes and household goods), resources, industrials and real estate.

Even gold, which is considered a safe-haven asset during tough times compared with riskier assets like shares, has been caught in the Covid-19 volatility and hasn’t had a spectacular run. The price of gold increased by only 5.9% so far in 2020 to $1,618 an ounce at the time of writing.

With double-digit daily swings in financial markets, are there resilient asset classes investors can find refuge in? Which assets can withstand difficult months to come as economies around the world reboot after their Covid-19 lockdowns? After all, Covid-19 is a health issue that some cities – like Beijing, China – have tackled by stabilising infection rates in about three months. But it will take many months for economies to recover from the devastating consequences of the virus.

Business Maverick spoke to three money managers about their Covid-19 investment strategies.

Wayne McCurry of FNB Wealth and Investments: Buy low, take advantage of the chaos in markets 

McCurry believes that now is the time to buy shares that have cratered in value. This is a strategy that has worked successfully for money managers over the past 30 (or more) years as the thinking is that markets will eventually go up. 

“When there’s chaos in markets, it is the only time that shares are truly cheap, presenting a once-in-a-while buying opportunity. But this goes contrary to human instincts because everyone is scared,” he says.

There is currently a large universe of perennial underperformers to buy on the JSE. The JSE’s sector-specific indices such as the Listed Property Index (real estate shares) is down 50% so far this year, General Retailers Index (retail shares) is down is 45%, Financials Index (banks and financial services shares) is down 41%, Industrials Index (shares of construction, transport, freight, and other companies) is down 7% and Resources Index (shares of mining companies, oil and gas producers) is down nearly 2%. Meanwhile, gold mining companies are the outlier, with the index comprising gold producers up 13%. 

“If you believe that some sort of normality will return [after Covid-19], you should be looking to buy stocks that have been hammered such as banks, retailers and property. And those that have come through relatively unscathed [such as gold shares] you should be looking to sell them and invest in domestic shares.

“Banking shares, for example, are trading below book value [the value of a company after all liabilities are paid back], which is highly unusual. If you bought company shares that were trading below their book value, you were probably quite happy in the following three or five years with your investment decision.”

Karl Gevers of Benguela Global Fund Managers: Finding refuge in companies with good balance sheets

Benguela invests in high-quality companies whose balance sheets are strong enough to withstand shocks like Covid-19. Gevers says some of these companies, which Benguela is finding refuge in, are those providing essential services during SA’s 21-day lockdown such as retailers and telecommunications companies. Benguela’s picks are Clicks (share price is up 4% so far this year), Shoprite (down 0.27%) and Pick n Pay (down 7.02%) and MTN (down 44%).

Although the share prices of these companies have been volatile, Gevers says the lockdown is not affecting their trading activities as they are required to continue supplying consumers with food, medicine, and telecommunications services. After the lockdown, the profitability of food and pharmacy retailers won’t be adversely affected, unlike clothing retailers or operators of eateries, which have been ordered by the government to completely shut their operations.

Says Gevers: “Pulling your money out of the market now is probably the worst thing to do. Volatility creates more opportunities. You need to keep your cool by looking through facts even if there is a lot of noise. It is important to have a solid investment process and philosophy, which will be your guideline. If you stick to that, you will do well.”

Reuben Beelders of Gryphon Asset Management: Cash is king

Beelders is cautious of only backing company shares during volatile times. His first prize is to protect investments from inflation, which can erode wealth as increases in the cost of living (inflation) can reduce the spending power of money/investment returns.

Beelders says investing in company shares can be effective to protect investments from inflation over the long term especially when financial markets are up. But investing in shares to counter the impact of inflation can backfire when markets are volatile and there are large drawdowns (when investments decline from peaks before recovering). 

“Typically, a market cycle [an up and down cycle] lasts for around seven years, with the up-cycle lasting around five years and the drawdown around two years. Effectively, this means that investors should be exposed to equities [company shares] in the up-cycle, but must avoid exposure during the periods of drawdown.”

The current Covid-19 era in markets could be characterised as a downcycle with large drawdowns. During times of large drawdowns, Gryphon believes investing in cash is the only solution for investors. 

Cash – such as deposits through a bank or money market unit trusts (a fund that invests money with different institutions) – is usually considered as a traditional safe-haven, offering safety from heightened volatility, but not always inflation.

“It is worth remembering that South African investors have over time earned a very good yield [return] on their cash, probably around 7%.” While stating the obvious, this should imply to investors that they should be certain of earning more than 7% in equities or bonds or an alternate investment, before they consider moving out of cash.” BM