Since the crisis in 2008, this has been one of the worst quarters of the financial markets. The pause in the economic activities caused by the COVID-19 pandemic has triggered one of the fastest drops in the markets with the S&P 500 dipping to near bear marketing in just 16 days.
Watch this video by Max Keeling, Head of Expat Advisory, for a quick overview of the markets.
Hi, everyone. I’m Max Keeling and I’m Head of the Expat Advisory Team here at Providend.
And our Head of Solutions, Chye Hsern, has just written his update that goes out to all clients on a monthly basis and he’s just done the review of the first quarter. So I thought I’d do a quick video to just pull out what I think is some of the key points that Chye Hsern wrote about.
Now, unless you’ve been living under a rock, you will know that in the first quarter, from the financial market’s point of view, has been pretty bad. In fact, it has been one of the worst quarters we’ve had or is the worst quarter we’ve had since 2008. And anyone that’s got a stock market portfolio will know that March was pretty brutal.
It’s one of the fastest falls that we’ve seen in U.S. stocks. In fact, it only takes 16 days for the market to fall into an official bear market. Now, the official bear market is a 20% fall from the peak. So we’re definitely in the bear market territory.
And what we’ve seen is if you’ve got a stock market portfolio, you’re probably pretty worried about what this means. And also what we’ve seen is people that are on the sidelines that haven’t invested yet or on the sidelines thinking, “Wow, I’m glad I didn’t start investing”. And so, it’s interesting for you to see both sides of it. But you’ve got to take a long term view and this is something that Chye Hsern wrote about in his market update.
Now, what made things worse as well over the last month is the issues that we’ve seen with oil. So oil prices have dropped to their lowest levels in 18 years. Part of that is demand-driven. Part of that is we’ve got a little bit of a battle going on between the Middle East and Russia and the U.S. as well. That is artificially bringing oil prices down.
So what have been the responses from around the world? Well, we’ve seen central banks in lots of different countries act very fast. Very fast compared to 2008 when it took months, if not years, for there to be a coordinated effort in what needed to be done. So we’ve seen the Fed in the U.S. pledging to buy unlimited amounts of U.S. treasuries. This is pretty unusual. In Singapore, we’ve seen pretty similar things. In the U.K., we’ve seen similar things where central banks are buying government bonds. We saw in Europe, the ECB committed to buying 750 billion of government bonds. So it’s really unprecedented how fast all of these different countries and governments and central banks have moved to try and ensure there’s liquidity in the market.
So why are they doing this? Well, effectively, in 2008, we saw this as a banking crisis and that basically trying to stop this becoming a banking crisis and liquidity crisis. So we’ve seen all of these central banks ensuring that there is liquidity for banks, for businesses to access cash to continue to lend. Because the issue is if governments are issuing debt, basically bonds, and no one is buying it, there’s going to be a liquidity issue. So by these governments stepping in, they’re making sure that there’s plenty of liquidity. And if you want to see what Singapore has done, then go and download these statements that Chye Hsern wrote just to understand this a little bit more.
So these are the numbers that we’ve seen so far at the end of Q1. So the MSCI All Country World Index are basically the index of all stocks around the world. We’re currently down 21% after Q1. And at the end of March, emerging markets were down 24%.
Now, the good news is that bonds we’ve seen, good quality government bonds, good quality corporate bonds, have actually remained up slightly and in March, have held on. And that’s exactly why when we build a portfolio, we have equities and we want bonds. And we want bonds to be the buffer in the portfolio. And that’s exactly what we’ve seen in Q1.
Now, unfortunately, here at Providend, we’ve seen clients that have got active bond funds or we’ve got prospects that coming to us and asking us to review their portfolios, they’ve got active bond funds in them. And some of those are down 15% – 16%. And that is not what we want to see when we’re building a portfolio of equities and bonds. We want to see the bond piece being the buffer. So if you are in active bond funds and you’ve seen this drop, this is why. This is why you want to be in high-quality government bonds, high-quality corporate bonds.
So will things get better? This is something we are often get asked for. People want to know what the future holds. And we don’t know. We don’t know any better than anyone else. What we do know and this is what Chye Hsern wrote about is “Markets are forward-looking”. They are always trying to price in all known data points. You got millions of people around the world trading every day and they’re going to price in everything we know. And what we know at the moment is the markets are assuming that it’s going to be lower revenues and cash flows. They assume that is going to be dividend cuts, which is what we’ve seen over the last few weeks of companies announcing. They assume there’s going to be higher debt levels. And so that is why the markets have dropped as much as they have. They priced all of that in already.
So when we see economic impacts become lesser or we start to see the coronavirus numbers dropping and we start seeing more companies issuing statements around whether this is positive or negative for them, we’ll definitely going to see markets moving pretty fast to try and price that in.
Definitely one thing is being invested in the markets long term always, always rewards you. That’s what this slide is showing you is cash is represented here by the One Month T-bills and that always is not a good long term investment. However, the markets are always up and down over time. And so that is part and parcel of investing. Last year was a fantastic year in the stock markets. This year looks like it’s not going to be so great. That is part and parcel. And that’s why you need to be invested over a long period of time, not trying to speculate, going in and out. And that’s what Chye Hsern is writing about.
One thing we do know is that to benefit from what’s going on, you need to stay invested. You need to have a 5, 10, 15-year plan. And what we’ve seen when we look at other crises and other times when the markets have dropped is over a 3, 5 year period. Markets always recovered.
So you go back to 2000. Sorry, go back to 1987. After one year, markets were up 19% if you’re in a 60/40 portfolio. So 60/40 is kind of a balanced portfolio. Well, you see a lot of pension funds and you would’ve been up 19% after 1 year, 33% up after three years, 76% up after 5 years. We basically see this trend, every time we’ve seen a big market crash, we look at a Dotcom bubble in 2000. That was three years where the market went down. Keep going down every year. And so here we saw action after three years, we weren’t really up. It took five years before you back up. And guess what? You were back up to similar levels to what we’ve seen before.
2001 and 2008, again, maybe the one year returns were not great, but after three and five years, we saw quite strong recoveries. And so what we really got to do at times like this is focus on your longer-term plan. And not panic about short term returns and just stick to the course. And this is when it’s great to look at data like this. Obviously, we have no idea what the next 3 to 5 years is going to look like but it’s good to go and have a data-driven or an evidence-based approach to these kinds of things to see what happened in the past.
A key thing is you need to be diversified as well. So what we know is, at the moment, we’ve seen some winners and we’ve seen some losers in terms of economic impacts to companies. We’re seeing some companies like Zoom that are doing fantastically well and their share prices going up. Obviously, we’ve seen a lot of companies in the travel industry really struggle at the moment.
But what’s key over a 10 – 15 years period is you need a diversified portfolio. And I think Chye Hsern wrote in here. Yeah, our equity portfolios have got 8 to 10 thousand stocks in them. I mean, you literally can not buy a more diversified portfolio on the planet. We’ve got the most diversified portfolios available. And the reason is that it’s very hard to pick who the long term winners and losers are. And that’s what this chart is trying to show.
Chye Hsern is trying to point out that from 1994 to 2018, your average return would have been 7.2% if you’d bought all stocks. And if you just took out the top 10% performance, your returns dropped to about 3%. If you took out the top 25, you were down to negative 5. So what that tells us is in any given year, it’s actually in the top 10 to 25% of companies in an index that actually contributes to positive performance. Actually, 75% of stocks might not do that well. Might not move up or down.
The bad news is academics have not found a systematic way to be able to pick who those winners and losers are every years. And this is the idea behind active management is that active portfolio managers are going to pick who they think the top 10% are at any given year. They might get it right one or two years in a row. But the evidence is very strong over the last 20 – 30 years that actually no active manager has been able to do this over 10 – 15 year period.
Good news is you don’t need to try and monitor the markets and work out whether you think Zoom’s gonna do well or not. You just need to buy all the stocks and just get the portfolio return over a long period of time. And that is why you really need to be diversified.
Now, I’ve talked about the bond funds earlier that we’re seeing some prospects and clients be in. It’s the same on the equity front. We’re seeing people come to us, asking us to review their portfolios. And some of the funds that they’re in have only got 40 – 50 stocks in them. And if you pick the 40 or 50 stocks that do not do well in any given year then this is when you start to see your portfolio returns be much worse than the general market and be much slower to recover when we see hopefully when we get past this coronavirus and we get past the economic impact.
So looking ahead to Q2, what do we know that you don’t? We don’t. All we know is, you know, the outlook doesn’t look great for the next few months. We’re not necessarily seeing countries turn a corner yet. We’re seeing lockdowns get worse or more intense. So in Singapore, as I’m recording this week, we’ve got a lot more lockdowns coming into place. So all you can do as an individual is: focus on your own health, focus on your well-being, make sure you’re in a diversified portfolio. Don’t panic. Keep investing if that’s what your investment plan is. If you’ve got spare money, think about deploying it if you can. But make sure, more importantly, you’ve got a wider financial plan in place and you don’t panic and you focus on what’s important.
If you’ve got any questions about anything that I’ve discussed in this video, then please send me a message and I’m happy to talk this through to you. Otherwise, go and download it. And maybe there’s something in here that would be of use to you.
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