Chief strategist: Time and patience the best protection against loss

COLUMN: Chief strategist Henrik Drusebjerg assesses the latest coronavirus developments, where governments and central banks are going all in to support the economy – and so also the financial markets.

Recent days have seen more and more countries close schools, shops, cultural sites and activities, and national borders to reduce the spread of the coronavirus. The sound reasoning here is that it is better to confront the virus head on than to limp behind, but naturally, these actions represent a major setback for the global economy while they are ongoing, and so they also hit equity markets very hard.

While the coronavirus may seem daunting right now, the crisis is in fact very well-defined in that we know the exact reason for the crisis. The uncertainty is when we can expect to return to something resembling normality again. No-one is sure just how long the world will be at a standstill.

Common to all historical crises, however, is that equity markets have always bounced strongly back again, and we expect that to happen this time too.

Massive economic support

Unless the world goes under due to the coronavirus, economies and corporate earnings will pick up again. Our ability to adapt, technology, willpower and decisiveness have ensured that all earlier economic crises have been overcome, and if you believe that will again happen this time, then as a long-term investor you should keep hold of your investments.

For, while there is currently a huge amount of uncertainty, there are also bright spots – not least in China, where the coronavirus first erupted. The outbreak in China now appears to be under control, and while Apple is planning to close its shops in other parts of the world, they are opening up again in China. In other worlds, the virus has not been the end of the world here.

In Denmark, Europe and the US, we are currently seeing a massive response from politicians and central banks, who are going all in to support economies and to avert a major economic crisis as a result of the coronavirus. The very swift fiscal and monetary policy easing measures being enacted at the moment have not been seen before in modern times – and that is heartening.

What investors should remember

For long-term investors, the best protection against loss has always been time and patience. However, the coming days and weeks will be a test for all investors. We will undoubtedly continue to experience massive price volatility, including days with pronounced falls.

But remember this:

  • Equity prices reflect the bad news we have already received. Further price falls assume, all else being equal, that the situation will unfold even more negatively than we currently expect.
  • Economic crises are often perceived as the end of the world when we are in the midst of them, but seldom in retrospect.

Things could quickly go the other way

Right now, no-one knows when we will be over the worst – not even the world’s leading virus and pandemic experts. We at Danske Bank will therefore not be making cocksure claims about exactly when the virus outbreak will peak, and economies and equity markets bottom out.

However, our main scenario is that economic activity will begin to recover in the second half of 2020, and given the major fiscal and monetary policy stimulation currently ongoing, the global economy will have very favourable conditions for accelerating again once the virus outbreak dies down.

Experience tells us that the turnaround in equity markets will come some way ahead of the turnaround in the economy. Historically, equity markets have been 1-2 quarters ahead of the economy, and things can very quickly go the other way once investors begin to see the light at the end of the tunnel. We saw this in the wake of the financial crisis, for example, when the US S&P 500 index rose 72% in the 12 months following the 9 March 2009 low.

Stick to your strategy

Despite the current uncertainty, we generally recommend that investors stick to their strategy if it fits their investment profile – including their risk appetite and investment horizon. For many investors this in fact means they need to rebalance their portfolios; in other words, sell off bonds and buy equities so they continue to have the aimed for allocation between equities and bonds – and therefore the desired level of risk – in their portfolios. If you have invested in an investment solution from Danske Bank, professional portfolio managers will ensure the continual rebalancing of your investments.

Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.

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