Why urgency now is need for calm

From an investment standpoint, now is the time for calm minds and a disciplined and methodical approach which includes having a plan and sticking to it

Michael Keaveney 24 March, 2020 | 1:18AM
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Editor's note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.

Michael Keaveney: The COVID-19 coronavirus is dominating world headlines, not only in terms of the significant health implications, but also in terms of the effects on financial markets. With the World Health Organization today characterizing the outbreak as a pandemic, there's a clear signal that urgent action worldwide is needed, as the global response has thus far been inadequate on several fronts to mitigate the spread and severity of the illness.

Small wonder then, that many investors are running scared, and that fear has translated to highly volatile equity markets and a flight to perceived safe assets. We've seen volatile markets before, and they are often brought on by these types of shocks. The specific shock varies. It can be public health related, political, military, or even an embedded flaw in financial engineering that suddenly reveals itself. Periodic drawdowns are part of the market cycle and should not come as a surprise to investors. Current market reaction has been Swift, especially after being coupled with an oil price shock and sentiment has lurched from complacency to catastrophizing very quickly.

Many appear to be in that latter phase right now and extrapolating what are more likely to be shorter-term effects far into the future. The volatility has not hit every market, sector, or stock equally or more to the point, proportionately to a well-measured assessment of the impact on long-term value. This creates opportunities for investors with a longer-term time horizon, and a robust framework for assessing value across many markets.

For some time, Morningstar Investment Management has been defensively positioned in our multi-asset portfolios. We operate under the guidance that risk is best managed before an event, not after. This has been helpful to mitigate the worst effects of the current downturn and creates opportunities through rebalancing from investments which have done well in absolute and relative terms and via cash flows to reallocate towards some equity sectors and markets with long-term favorable valuations.

Not all equity markets are screaming buys right now, even with the current downturn. Remember, we've had a long bull market in many asset classes, and the current fall still leaves some markets running ahead of attractive valuations. From a public health standpoint, the COVID-19 coronavirus is already very serious and likely to get much worse before it gets better. And it will require aggressive and globally mobilized intervention to mitigate the worst-case scenarios. From an investment standpoint, now is the time for calm minds and a disciplined and methodical approach which includes having a plan and sticking to it. That is the urgent action appropriate for investors.

For Morningstar Investment Management, I'm Michael Keaveney.

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Michael Keaveney

Michael Keaveney  Michael Keaveney, CFA, is Director, Investment Management at Morningstar Associates, Inc.

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