Don’t punch yourself out on the past seeking a post-pandemic playbook
Comparing past market corrections with this one can be a bit like picking all-time great footballers or heavyweight champs – Pele or Maradona? Mohammed Ali or Joe Louis?
Deep down we know they are impossible comparisons, but we like to make them anyway.
As global financial markets are rocked by the pandemic, it is natural to look for lessons from 2009, or increasingly as the situation deteriorates, from 1929.
Just as we would not base our future investment strategies on the past performance of asset classes, neither should we assume there is a playbook for past crises that can provide answers to the current challenges that markets face.
That is because they were ultimately financial in nature while this crisis is existential.
It is also changing everyday behaviour in a way that previous crises have not and so it is inevitable that it will also change investors’ behaviour.
That is not to say historical market crashes do not hold some lessons that are applicable today — because of course they do.
We know for example that most market corrections take place over a few weeks followed by a period of volatility, in turn followed by a rebound.
Much will depend on when the pandemic peaks, which will determine when we move from the so called ‘Minsky moment’ that bookmarks the sudden collapse of asset values and the end of a growth cycle, to a new period of stability.
In charting that process it is worth remembering that what we are witnessing now in asset values is not all about the pandemic per se.
Rather we are seeing how markets are responding to what has been an extended period of highly leveraged growth associated with the era of low interest rates and quantitative easing in the decade that followed the last financial crisis.
The world was left with a lot of debt in 1929 and in 2009 and will be again, giving us some sense of likely policy responses from the Fed, ECB and major governments as they seek to ease the financial burden on their key industries, wealth generators and populations.
We are already seeing that so called ‘safe haven’ assets are not responding as we might have expected in the past, because the very notion of the safe haven is also being challenged by this pandemic.
Thematically, health, demography and especially technology, will become a much bigger part of the post-pandemic portfolio.
It is technology that has kept disconnected families connected in recent weeks and it is technology that has allowed us to do our jobs from home while educating our children at the same time.
It is also technology that is helping governments map and monitor the spread of COVID-19 and ultimately save lives in the process.
The digital disruption of some sectors and processes that was already well underway before anyone had heard of this virus, will pick up speed and continue to influence investment portfolios for years to come and portfolios will be adjusted accordingly.
Beyond these individual sectors which are already attracting increased investment flows, we are likely to see a much greater focus on sustainability as ESG again comes to the forefront.
The pandemic has been a lesson for all in how an issue once seen in abstract and distant terms can suddenly materialise and change everything.
Only a few months ago, a strange-sounding virus that emerged in a city in China might have occupied our thoughts in the same vague way that a melting polar ice cap would.
A worry, yes, but not one to lose sleep over just yet - at least not until your own apartment is submerged. Now we know differently.
The pandemic has shown that we need to invest, literally and figuratively, in a more sustainable way of living.
*François R. Farjallah, Global Head of the Middle East & Africa for Indosuez Wealth Management