Investors must beware rallies in the immediate aftermath of the coronavirus related stock market falls, Hinesh Patel portfolio manager at Quilter Investors, has warned.Share prices around the world have dramatically fallen in response to the effect the coronavirus will have on the global economy, but have also rallied on the back of various stimulus packages announced by governments around the world.
However, Patel believes that while returns remain attractive in the long-term, investors should be careful of market moves in the immediate term as markets could yet go lower.
Data from previous market crashes shows that share price lows may not come about until much later in the crisis and thus any short-term rallies should be treated with caution.
“Investors need to be careful not to jump straight in just because we have experienced that initial shock of falling share prices followed by a bit of a bounce. While opportunities can present themselves, timing the market is a very difficult thing to do and you are better off staying invested throughout so you do not miss out on the best days in the market,” Patel says.
To illustrate, over the last 25 years, an initial investment of GBP10,000 would have seen an investor who stayed in the markets throughout the period have a potential return nearly three times greater than that of an investor who missed the 25 best days.
Patel says: “Furthermore, volatility is going to be present for some time and we are only really at the beginning of this crisis. Many companies are yet to assess the true damage coronavirus has done to their businesses and as such it is easy to see further falls could be possible.
“While valuations are still not ‘cheap’ per se yet, investors will be best served utilising a multi-asset approach in order to smooth the volatility out as much as possible, while taking advantage of returns when they come.
Looking at the FTSE All-Share index, the market did not reach a low during the Global Financial Crisis until week 25 following the first falls, while during the 2002 period of weak global growth markets didn’t reach a low until 39 weeks into the period of volatility. Both of these periods saw multiple market rallies but these ultimately faded out as volatility remained.