02 Mar Corona virus outbreak – It’s not too late to act
Coronavirus caused a tremendous market turbulence. Everyone was expecting a crisis – is this it? Could it just be a temporary panic in the market that will dissipate once the Corona outbreak is contained??
Experts express different opinions, but investors must be prepared for any outcome even if they are in the market for the long term.
Many long-term investors think they can ignore such “temporary” market turbulence for two reasons: they are in for a long run and they are not hurt by mark-to-market volatility of their investments.
While it is true that equity markets will recover eventually, the investors should remember that some companies will go into default and their equity value will never recover. It is also true that a well-diversified portfolio typically provides risk reduction, but we’ve seen how diversification disappears in crises. Good investors or financial advisors perform severe stress testing of their financial plans but unless they look at an exhaustive set of possible outcomes, they never know whether they covered all the important and relevant scenarios.
As always, the right question to ask is not which scenario evolution will likely materialize – it’s impossible to tell. Even if we could somehow forecast how this outbreak plays out, there is no assurance that other events and calamities will not occur causing a double dip. Assessing the potential combinations of shocks and market reactions is a daunting task.
The only way to prepare for the unfolding of current unprecedented shock is through analyzing multiple potential outcomes that consider changing interrelations between market drivers and secondary and third order effects, and diminished diversification.
The right questions to ask now are: (a) what are the potential outcomes (within reasonable probability); (b) what is the impact of these scenarios on my portfolio; and finally (c) what (if anything), should I do? How do I know when to act?
Of course, it’s better to start preparing before the panic broke out but it’s still not too late!
Credit spreads haven’t widened substantially yet. By using Straterix advanced Scenario Generation Engine, combined with its powerful AI driven analytics, we project that Dow Jones Total Stock Market Index could experience a drop of 30% or more by the end of Q1 and more than 40% by year-end.
At the same time, we show that if the current market trend continues due to the further spread of the Coronavirus, or other events, credit spreads of higher quality bonds can more than double, substantially increasing the probabilities of downgrades and defaults.
Our quick check analysis can help your organization make timely decisions on what assets to buy or sell, how to allocate the reinvestments and whether you need additional capital cushion.
Straterix-generated scenarios consider not just what we know today, but what other potential events could affect us. Given our engine’s power, it takes but a few hours to generate these scenarios and to assess their impacts on your portfolio outcomes. While we normally recommend running our analysis on a quarterly or monthly basis, we are now advising clients to make sure that market variables are updated weekly, and to run the generation of scenarios and analysis weekly.
Our SaaS platform and expert consulting help clients prepare for anyoutcome, form contingency plans and fortify their portfolio positions.