Financial markets are fuelled by fear and greed. Essentially, greed drives prices up … and fear causes them to fall. The investor’s emotional cycle:
Unsurprisingly, fear around COVID-19 has made investors believe that shares that were worth a particular value 3 months ago are now worth 33% less. Yet unless something fundamental has changed, this is both irrational and unsustainable.
The chart below shows that for 5 years or so, investors believed the JSE All Share to be worth between 50 000 and 60 000. Alarmingly, in the space of just a few weeks, that value is allegedly now less than 40 000. This is not logical.
Put simply, portfolios owned at the beginning of the year have the same mix of assets that it did then. Selling or switching now locks in losses, permanently removing any chance of recovery.
There is no doubt that COVID-19 will have a profound effect on global growth, supply chains, availability of merchandise and medical supplies. Tragically, people will die, particularly the most vulnerable, which is why governments around the world are taking measures to ‘flatten the curve’.
However, this too shall pass … and for savvy investors, it is the time to hold fast, however difficult this is. Markets overreact in both directions – and global markets are already in oversold territory.