Lessons from the past

Stock markets worldwide are plunged into chaos amidst the fear and uncertainty that the COVID-19 virus is causing. This fear and uncertainty is much more contagious than the virus itself.

The facts are that markets worldwide have fallen by 30% and more, with daily fluctuations of up to 12%. By the time you read this it may be more or less…

What makes this fall in stock markets different from the previous cases is that it is the sharpest (not the biggest) fall of all major financial crises so far. The second difference is that you can actually get sick and possibly die. It causes human behaviour to become totally unpredictable and it then manifests itself in stock markets.

Contrary to popular belief, this crisis is no bigger than any previous crises. We quickly forget how we felt in 2008 with the banking and debt crisis or how we reacted when we turned on the TV in 2001 and saw the World Trade Centre collapse.

The most meaningful response in uncertain times is to act logically, and not panic, with your investments and most likely to do nothing. History proves this. It also prevents emotional reactions we have been warning against. This is not pleasant to hear, but it is the right decision.

Your funds are invested to achieve your long-term goals by investing in asset classes and companies that can offer you income and capital growth over 10 years and longer.

No one knows how long the current crisis will last and what all the consequences for markets and humanity will be. What we do know is that most companies in the world are better equipped now to deal with a crisis than they were in 2008 when their existence was in danger.

The following table shows the recovery of the markets after similar crises:

From this table it is clear that the recovery after a major crisis is usually as sharp as the fall. The entire loss is not necessarily wiped out immediately, but if you miss the initial recovery it will take you years to regain your capital.

An example is Standard Bank, a stock that we were very positive about and still are. Price earnings are currently 5,7. During 2008 it fell to 8,5 times earnings and at that stage the existence of Standard Bank (and other banks) was in jeopardy. The dividend yield is currently 10%, which is significantly more than the interest they offer their clients. Even if the dividend decreases by 20%, it is still 8% and thus a fantastic return.

In times like these it is important to stick to your existing long-term plan and talk to us about questions and concerns. All our advisers are on duty from their homes during the next three weeks and you are welcome to contact us via the switchboard or on our cell phones.

Please contact one of our expert advisors for further information.

The above-mentioned is for information purposes only and is in no way advice. BVSA Consult Pty Ltd. encourages readers to get in touch with an expert financial advisor before making any decisions.

Article written by Guillaume Oberholzer

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