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Liontrust Insights: Surviving the Coronavirus bear market

By John Husselbee, Head of Multi Asset at Liontrust Asset Management

There are moments in horror movies when you might not only cover your eyes but also forget that it is only a film and you will soon be back in the real world. On occasions, investors can get the same feeling when watching stock markets.

We have experienced huge turbulence in global stock markets prompted by the coronavirus (COVID-19) pandemic and the spat between OPEC and Russia over oil production. This included a 10.87% fall in the FTSE 100 – what I call the 10 O’Clock News index – in just one day (12 March). 

This is the fourth bear market of my career and while the catalysts are always different, there are clear similarities that we expect this time as well – although, like everyone else, I cannot say exactly when that will be.

So far, markets have treated the pandemic as a classic growth scare and reacted in typical bear fashion: the difference to previous declines has been the speed, with the slowest bull run in history quickly giving way to one of the rapidest bear markets.

Amid huge daily declines in stock markets, we have seen emergency policy responses from central banks in cutting interest rates to record lows and providing much-needed liquidity and lines of credit, with none of the moral hazard concerns that muddied the situation around banks in 2008. With many businesses threatened as countries enter lockdown periods, we would expect much more of this to come.

Looking to the next few weeks and months, there remains a huge amount of uncertainty and it is imperative we avoid the panic that has overtaken markets. Without being flippant, this is not the end of the world and things will recover – market particpants are currently attempting to bridge the gap between reality and perception when it comes to the ultimate impact on growth and that will lead to abundant debate over U versus V-shaped recoveries, and other letters beyond that.

It is always useful to put dramatic, short-term events into a long-term perspective: over Monday 19 October and Tuesday 20 October 1987, for example, the FTSE 100 fell 23% as Black Monday hit, but over the subsequent five years it produced a total return of 74.8%.

Bull markets ultimately last far longer than bear markets and these falls become mere blips on performance graphs the further back in history you go.

Another message to get across is that falling markets will always feel uncomfortable but a drawdown only becomes a loss when investors crystallise it by selling. Again, looking at history shows many of the worst days in markets are often followed by some of the best and selling out means missing these recoveries.

If you take the FTSE 100 stretching back to 1984, there have only been nine negative years out of 36, meaning positive 12-month periods are four times more likely. The average annual maximum drawdown over the period is 14% but in the majority of cases, the index ended that period in positive territory.

What previous bear markets have taught us is that staying calm is vital and getting caught up in the fear and greed-inspired push and pull of volatile markets can be dangerous. No one can control markets but we can control our own emotions – and when it comes to investment, this means falling back on a robust, consistent and repeatable investment process.

Equity markets have consistently proved the best way to generate real returns to exceed inflation but they rarely ascend in a straight line and we have to expect corrections on the path to long-term reward. Our focus remains on patient investing – the winning by not losing we talk about so often – and what this requires is the ability to look through short-term periods and keep faith in the long-term process.

Warren Buffett, as perhaps the world’s most famous investor, is finding himself quoted more often than ever in these troubled days and his claim that ‘the best new investment idea is often to buy more of what you already own’ is likely to prove particularly over the course of 2020.


Liontrust Key risks and Disclaimers

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term. Investment in the GF High Yield Bond Fund involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Fund may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 

MeDirect Disclaimers

This information has been accurately reproduced, as received from Liontrust Fund Partners LLP. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.


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