April 6, 2020


By Alan Wood, Head of Investment Consulting

“If you can keep your head when all about you… If you can wait and not be tired by waiting.” Rudyard Kipling

This time it is different because human lives are at stake. The COVID-19 novel coronavirus pandemic is a humanitarian crisis that has caused a sudden, deep economic crisis, which will bankrupt some vulnerable companies and increase unemployment around the world. Hopefully, we will avoid a protracted recession and a global banking crisis.

At the time of writing, well over 1 million¹ people are known to be infected by the virus, which has caused the untimely death of about 50,000¹ people.

In a bold move to save lives, for the first time in history, governments have implemented “lockdowns” and other less intense forms of “physical distancing” that have disrupted the daily activities of billions of people around the world, bringing the demand side of the global economy to a sudden grinding halt. The times we are living in are truly unprecedented. We simply have no idea how long it will last. What started off just a few weeks ago as a genuine concern about a supply shock out of China, has rapidly developed into a full-blown freeze on all but essential economic activities around the world.

As a result, in global markets, we have experienced the fastest bear market since the 1930s, as stock markets across the globe crashed in response to panic, because of uncertainty and fear. Many market commentators have also stated that there have been a number of “forced sellers” in illiquid markets that have forced prices down so rapidly.

We didn’t see this coming and we don’t know when it will end, which explains why stock markets around the world have reacted so violently, recording record daily ups and downs. At the time of writing, stock markets are up again, most likely in response to huge amounts of stimulus being pumped into the global economy. In fact, the Dow Jones Industrial Average recorded its fastest bull market in history, being up over 20% in just three days during the fourth week of March 2020.

We are in for some very tough economic times, especially in South Africa. Our economy was fragile at the start of the crisis and our government’s balance sheet was already stretched beyond its ability to cope, without drastic policy intervention.

Having said this, now is not the time to despair, panic, or sell out of your long-term investment strategy. This is not the first time we have experienced a pandemic or a financial crisis. In the end we will prevail. Even members who are close to retirement should not panic. Even though many members close to retirement will see a negative return on their savings over the last few months, the cost of purchasing a life annuity (especially an inflation-linked annuity) from an insurance company should have dropped significantly. Living annuitants require specific advice from a financial planner, but need to realise that selling out of equities at an all-time low has many times proven to be a bad idea.

Pandemics in the past

This time the pandemic is different, because globalisation has assisted the spread of the virus and connectivity provides real-time updates. But influenza viral pandemics are not new phenomena2.

  • In 1918 to 1920, the Spanish Flu pandemic infected over 500 million people and is thought to have killed more than 50 million people.
  • In 1957, and then later in 1968, the Asian and Hong Kong Flu pandemics each killed between 1 and 4 million3
  • In 1977, Russian Flu infected an unknown number of people, but was serious enough to go down in the history books as a pandemic.
  • The 21st century has had its fair share of influenza epidemics and one pandemic, including the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003, the Swine Flu pandemic (2009 – 2010), the Middle East Respiratory Syndrome (MERS) epidemic in 2012, and the Bird Flu epidemic around 2014.

The typical flu season infects 340 million to 1 billion people, killing between 290,000 to 650,000 people a year.

We are currently experiencing a very painful and tragic crisis, but this is not the first pandemic the world has been through and neither will it be the last. At some point we will come through on the other side of the pandemic.

Response by governments impacting on the global economy

“The world is entering a recession and it will look very different when it comes out the other side.” – Mohammed El-Erian

Many countries have closed their borders and gone into lockdown, restricting activities to essential movement. Airlines have grounded their fleet. Shopping centres have shut their doors. Sporting events have been cancelled. Supermarket shelves around the world have been emptied through panic buying, as we move into survival mode for the foreseeable future to try to kill the virus through starvation.

As with all radical treatments, there are side effects. As we work hard in solidarity with our fellow human beings around the world to kill the virus through isolation, we are suffocating the global economy. The impact of a huge sudden halt in the daily economic activities of billions of people around the world is unchartered territory.

“Exogenous shocks are, to borrow from Thomas Hobbes, ‘nasty, brutish, and short’.” – Mike Ryan, Chief Investment Officer Americas UBS Global Wealth Management

There is no doubt that a global recession has started. How deep this recession will be, or how long it will last, is unknown. This depends on how quickly we can start to turn the tide against the virus and resume normal activities. Mike Ryan from UBS believes that because the COVID-19 pandemic is exogenous, its impact will be similar to that of any other natural disaster – “nasty, brutish and short”. We know that he is right on the first two points, let’s hope he is right on the third point.

McKinsey & Company4 has considered a number of economic scenarios over the last few weeks that have being updated regularly as the pandemic unfolds. Table 1 provides some insight into the expected impact of the virus under a scenario that some market commentators have categorised as a base case scenario with a 50% to 60% probability, with the following assumptions:

  • We are able to contain the virus, including a very limited second-round effect later in the year, when the Northern Hemisphere goes back into its flu season.
  • Central bank monetary and government fiscal interventions partially offset the economic damage of short-term economic shutdowns.
  • We are able to avoid a banking crisis.
  • Recovery is somewhat muted.

The economic growth numbers in South Africa are likely be similar to the Eurozone, even if we are able to manage the virus better than them.

Another scenario that market commentators have assigned a 30% to 35% weighting to is that it takes a bit longer than initially expected to contain the virus and there is a resurgence later in the year. Under this scenario, the world could experience economic recessionary conditions similar to World War II. The graph below provides some insight into historic levels of economic recessions in the US. It seems likely that we are headed for a recession which is as deep as the recession just after World War 2, potentially with unemployment of around 20%, last seen in the 1930s.

Stock market reaction

In response to the sudden shock and uncertainty created by the COVID-19 virus, stock markets around the world crashed by more than 30% from their mid-February 2020 highs.

Many market commentators have described this crisis as being reminiscent of the stock market crashes of Black Monday (1987), 9/11 (2001) and the Global Financial Crisis (2008/9) all rolled into one. The speed and synchronization of the drop in stock markets around the world is unprecedented.

The graph below provides some insight into the weakening of global (MSCI in USD) and our local (JSE in ZAR) stock markets.

Loss in Value of World Stock Markets

Local bond market reaction

Generally, in times of distress, investors sell out of equities in favor of safe-haven investments. Globally, all asset classes have been sold off, including bonds and gold. The only safe-haven investment has been cash. SA bonds have been sold off more heavily than global bonds, because of a liquidity squeeze in the market and also likely because investors were discounting the credit downgrade which was announced by Moody’s on 27 March 2020.

The appropriate response to current markets

There has been some short-term recovery in global equity markets from the lowest point in mid-March 2020, and a slight reduction in volatility. This recovery reflects that markets have a strong desire to believe that the huge amounts of financial and fiscal stimulus that have been pumped in to keep the wheels turning will work. It is likely that we’ll need to see a lot more evidence that the battle against the virus is turning in our favor before we’ll see any sustainable recovery in markets.

However, market timing can be very dangerous, especially if your financial wellbeing depends on it, and is best left to speculators who have a much higher tolerance to cope with a permanent loss of their capital. Studies over many years have shown that investors who attempt to time the market by moving into low-risk investments when markets are falling, destroy value in the long run. They usually simply lock in the recent losses they have experienced and miss out when investment markets recover.

We remind our clients that we are investors, not speculators. The most appropriate response for any investor in these troubled times is to see beyond the next six months and into a future where we will look back on the impact that COVID-19 had on us in 2020.

This time, the details may be different, but the storyline hasn’t changed much.

This time will pass for investors.

1 www.worldometer.com Figures as at 3 April 2020, changing real-time


3 The exact number is unknown. There are various sources estimating between 1 million and 4 million.