Market flash: how to react to the epidemic (and the market downturn)?

As part of our partnership with Savinianne, consultants in wealth management, we are pleased to provide you with the latest recommendations as to the impact of COVID-19, or “Coronavirus”, on the financial markets.

This morning, the financial centres opened in significant decline after the sharp drop in oil prices decided by Saudi Arabia, in face of the epidemic. Financial markets operate on anticipation, but the problem posed by an unknown virus is that we do not know what to anticipate.

Also, after having ignored the phenomenon over the last few weeks, the markets are now reacting very strongly.

What to do in such an uncertain environment? Two suppositions are now emerging:

Case 1: the epidemic lasts a few weeks

If this is the case, the fall in the markets is already excessive and a general decline is not justified. It is logical that air transport, tourism and leisure should be impacted, but for example, the 40% drop in bank values anticipates a serious and deep crisis. The drop in central bank rates is certainly not good news for the profitability of banks, but the movement is reversible and a rebound likely.

Case 2: the epidemic lasts for several quarters

There will then be victims, and probably more job losses than deaths… Bankruptcy filings can weaken suppliers and the creditors of companies in difficulty. However, the general decline stretching across all sectors suggest panic and will create buy opportunities, generating post-crisis performance.

Other consequences:

• Poor medium-term prospects for euro funds, which will over-invest in periods of negative interest rates and will also have to provision for unrealised losses on equity portfolios.
• The phase of increases in real estate (offices) yields will continue. A further fall in interest rates will make these long and regular high-yielding assets even more attractive.

What adjustments to make to your allocations?

For the more cautious investor, we would advise temporarily arbitrating in favour of real estate vehicles with low entry costs (SCIs or SCPs – unlisted companies) for their solid annual performance of + 2% to + 3% during this crisis phase of uncertain duration.

For the more daring, you could recommence gradual exposure to the markets in several stages, with no urgency, focusing on 4 areas:

1 / Long short funds  

A simultaneous buy/sell position neutralises around 70% of market trends, in favour of the relative performance of undervalued stocks compared to those deemed overvalued.

2 / Listed property companies  

(With the exception of those over-invested in shopping centres), being driven down, even though they benefit from the fall in rates in the same way as unlisted real estate vehicles.

3 / Sectors that have been spared  

To cite an example, rubbish and wastewater treatment has not dipped with the epidemic. Lockdown even accentuates problems of concentration and treatment. Fidelity Water and Waste figures in a lot of contracts and is an opportunity at current prices.

4 / Structured funds  

Renewed volatility creates a situation where the structuring of promising funds makes it possible both to remain protected in the event of a further decline while having high profitability in the event of moderate decline or stability. This is a solution to consider for that part of your savings that can remain with a long investment horizon.

We are at your disposal to answer questions and alter the current allocation of your contracts if you wish.

Vincent Danis