Last update: 17.09.2024 08:35
If someone had told me two months ago that the stock market would be 30% lower, I would be working from home every day, children would be on “corona vacations” and home schooling and public life would be all but shut down, I wouldn’t have believed it.
And yet coronavirus has changed everything, including investing.
We take a look at corona and investing: what happened why – and what you can do.
Corona is different
The coronavirus is a highly contagious virus that causes the disease COVID19.
Corona has only been affecting people since around December 2019 and is usually transmitted by droplet infection via the respiratory tract or eye mucosa.
Because coronavirus is new, no one has antibodies yet and there is no treatment or vaccine.
What makes coronavirus so treacherous is that the virus has a comparatively long incubation period and many infected people show no symptoms.
In other words, many of those who have it don’t show it, but they continue to spread it.
This is how it has spread almost unnoticed throughout the world and Switzerland. Unlike influenza, both the risk of infection is significantly higher, with a spread rate of 3 (i.e. three new infections per person infected), as is the mortality rate.
Because many sick people need artificial respiration and intensive care, the healthcare system is at risk of reaching its capacity limits.
This is why we need to slow down the spread of the disease, because otherwise those who are ill cannot be treated appropriately.
Corona can be brought under control
China has managed this.
Within 8 weeks, the Chinese brought the outbreak under control and showed that containment measures work.
After 2-3 weeks of widespread quarantine, the peak of new infections was reached, and 8 weeks later the Chinese economy had returned to around 80% of its previous level.
But China is China….
Are the USA and Europe acting with similar determination to contain the outbreak?
And is the individualistic population here adhering to social distancing rules as strictly as in China?
Corona and investing: a health crisis, not a financial crisis
The containment measures taken by governments are painfully restricting economic production, as there is a shortage of labor and supply chains are interrupted.
This creates a supply shock because production is no longer taking place.
The measures also restrict people’s freedom of movement and public life.
Because people can consume much less due to social distancing and movement restrictions, domestic consumption is also collapsing.
This is a demand shock.
Several shocks at the same time
The financial markets are currently experiencing several shocks simultaneously for the first time.
On the one hand, corona with the supply and demand shocks and their difficult-to-assess consequences.
And on the other hand, the oil price war between Saudi Arabia and Russia is running almost unnoticed in the slipstream, so to speak.
The oil price is falling, w ecause the OPEC cartel was unable to agree on production limits, global demand for oil is falling due to coronavirus and Russia and Saudi Arabia were unable to agree on a price and are now both producing as much as they can.
Financial markets translate information into prices
It is unclear how the financial markets should price all of this in, as the facts and opinions are changing rapidly.
The barrage of new news following the increasing spread of the coronavirus is therefore causing the prices of practically all assets to fluctuate or fall sharply. The exponential function of the viral spread works faster than most people can imagine.
For them, coronavirus and investment do not go together.
Measured against the MSCI World Index, a global share index, this amounts to a whopping 32% fall in share prices in the last month.
The uncertainty is causing many investors to flee to cash, selling everything, including bonds.
OMG, maybe it will be even lower tomorrow?
Performance of the MSCI World Index March 2019-March 2020
Source: www.ariva.de/msci_world-index, March 21, 2020
Companies in sectors with physical production and goods such as automotive, tourism, aviation, trade fairs/events and logistics are particularly affected.
There are opportunities for companies in the fields of fintech, e-commerce, online gaming & entertainment and online education, which are benefiting from the shift in demand and their location-independent production.
Performance of the MSCI World Index as at March 21, 2020
Source: www.ariva.de/msci_world-index, March 21, 2020
In addition to facts, investor sentiment also has an impact on the financial markets
The financial markets go through different cycles, which have different psychological effects on investors.
When valuations are high and everything is going well, investors feel vindicated and confident and believe that things will continue like this for the foreseeable future.
They complacently ignore warning signs such as high valuations.
This good feeling is usually followed by great nervousness when the markets start to fall.
“You want to be greedy when others are fearful.
You want to be fearful when others are greedy ” (Warren Buffet)
Fear&Greed – Cycle: what emotions drive investors in market cycles
Source: www.fxstret.com
Many investors are currently in an open panic and want to cash in their shares as quickly as possible – for whatever reason.
They need money, have to close open positions due to margin calls or simply expect prices to fall further and further.
They believe that coronavirus and investing don’t go together and simply want to “get out”.
But nobody knows how prices will develop next month.
Nobody knows how long the virus will affect the economy.
Maybe there will be an effective treatment in two weeks?
Or a vaccine in two months?
Or the virus will experience a rebound in China and a new wave of infections will occur there?
Corona aid programs to cushion the economic impact
It is now clear and inevitable that the coronavirus will lead to a recession in Europe and the US in the second quarter.
Central banks and governments have launched various aid programs to dampen this.
These are intended to prevent liquidity bottlenecks for companies and consumers, mass redundancies and company bankruptcies.
For every month that the restrictions are in force, experts believe that state transfers of 1-2% of the annual gross national product to the private sector.
Measured against this, the announced programs are massive: 22% in Italy, 16% in the UK, 15% in Germany, 11% in France and 10% in the USA, with negotiations currently underway for a third program of a further 5-7%.
In addition, the European Central Bank has announced that it will buy up USD 750 billion in bonds to provide liquidity in the market.
In Switzerland, the aid package of CHF 42 billion covers 6% of annual economic output, of which around half is for short-time working and the other half is liquidity aid for SMEs from the banks.
The motto around the world is “don’t spill the beans”, but rather “get tough”.
What’s next for corona and investments
The future development of coronavirus and financial investments depends on the emerging opinion on two questions.
Firstly, how quickly can economic life, which is currently severely impaired, return to normal?
Secondly, how well can the various aid programs of governments and central banks limit bankruptcies and unemployment?
This gives rise to three scenarios for economic growth: firstly, “V-bend” (a fast diver with a rapid ramp-up in the third quarter), secondly “U-bend” (a prolonged economic dip followed by a recovery in the fourth quarter of 2020), thirdly “L-crunch” (a prolonged disruption to growth in 2020).
Nobody knows today which scenario will occur.
The market is currently expecting a U-slump.
What you can do now
1. stay healthy, stay home
Stick to social distancing.
If you stay at home, you minimize contact with other people, do not become infected and therefore do not transmit the virus.
In this way, you ensure that the epidemic subsides because the infected people heal and no longer transmit the virus.
By staying at home, you are helping to ensure that restrictions can be eased more quickly and your life can return to normal more quickly.
2. see the opportunities
Have you ever achieved something you are proud of?
It was a challenge for you that made you grow and gave you strength and confidence for the next step.
We will master this collective challenge in a stronger way.
A futurologist offers an exciting perspective on this .
What will you have learned to appreciate in 6 weeks?
What new skills will you have learned?
What have you changed for the better in your life that didn’t seem possible before?
Think about it.
Our tip: don’t let the temporary market fluctuations or the barrage of bad news unsettle you.
As things stand today, corona will not pose a threat to the existence of a relevant number of companies around the world.
And hopefully not for you either, because you know how to protect yourself and your loved ones.
3. keep a steady hand when investing money
Nobody knows what the future holds.
But sometimes it helps to look to the past to assess current events.
Since 1900, there have been more than a dozen hyperinflations, 20 recessions, almost 200 sovereign debt defaults or debt crises, two global financial crises and 12 bear markets (prices falling over an extended period).
Geopolitically, there have been seven global pandemics, two world wars, hundreds of civil or regional wars, more than 2,000 nuclear detonations and revolutions in the world’s largest and most populous countries.
Nevertheless, the world’s population has grown, the global economy has risen and global equities achieved an average nominal return of 7.5% year on year from 1970 to 2018.
Adjusted for inflation, your chapter still grew by 4.7% per year in real terms.
It is impossible to predict today whether a V, U or L bend will occur in the coming months with coronavirus and investments.
The current crisis will certainly be a deep cut in the price chart in 10 years’ time – but possibly only that.
Perhaps it offers a wonderful opportunity for people who are still building up their wealth to stock up on assets at a much lower price.
Although it may be tempting in view of the substantial price declines of many stocks (30-50%), we would leave the purchase of individual stocks (“stock picking”) to professionals and instead focus on entire markets with ETFs.
We are convinced that a disciplined, diversified and long-term approach to investing is the best way to increase your wealth over the long term.
In the next article, we’ll take a closer look at what coronavirus and investing mean: What should you do with your portfolio?
Should you sell?
Should you buy?
Suspend, start a savings plan?
Stay tuned.
Mach den ersten Schritt zur finanziellen Unabhängigkeit
In einer Minute siehst du deine Vermögensentwicklung und dein Einkommen während der Rente.
