The extreme market volatility currently being experienced due to concerns around the spread of COVID-19, commonly referred to as Coronavirus, is seeing investors exiting global equity markets in attempt to cut their losses. However, this approach is counterproductive and instead, investors should ignore the daily fluctuations and remain focused on their long-term investment objectives. “While it’s natural for investors to want to guard against further pull-backs during market drawdowns, it is vital to maintain perspective as steep, short-term downturns ultimately smooth out over the long term,” says Wikus Fourie CEO at Old Mutual Wealth, “History shows that volatility and drawdowns are inherent in equity investing. It’s not uncommon to experience intra-year declines well over 10%, yet, more often than not, markets recover from those drawdowns within the calendar year. It’s therefore highly probable that exiting the market during periods of heightened volatility will result in investors missing the upside that inevitably materialises.”

Fourie says that “the Coronavirus is a black swan event that nobody could have foreseen. Market participants and economists alike, have been for some time trying to predict what will derail the global economic recovery and record-breaking financial markets. Trade wars, debt, Brexit, geopolitical tensions were all among the suspects, yet no one foresaw a virus potentially doing the job. This is a great example of why forecasting is close to impossible. A far more efficient and effective approach is ensuring that we remain invested in high-quality businesses that can withstand the market volatility that ensues from the onset of unknown events.”

Accept the volatility

Accepting the volatility in markets will help investors maintain the perspective and fortitude required to stay the course through both good and bad times. The danger for investors lies in withdrawing from the market and missing out on the early, possibly rapid price recovery. Historical market data shows that periods of volatility and downturns are typically followed by enduring upward swings. Furthermore, Fourie points out that going back to the late 1800s, the S&P 500 Index has never yielded a period of negative real returns for investors who have remained invested for a 20-year period. These periods include both World Wars, the Great Depression and the Global Financial Crisis. “This highlights the power of remaining invested for the very long-term. We acknowledge that not all investors have a 20-year investment horizon, which is where effective asset allocation comes into play.” According to Fourie, the

strength of an investment portfolio’s returns is correlated to the quality of its underlying assets.

Return on Capital

“When investing in a business, our philosophy seeks to identify companies that can generate superior returns on capital. This is typically achieved by companies that have high and sustainable margins. Alongside this, we aim to identify businesses that can grow to deploy capital at those higher rates of return. “From a leverage perspective, we prefer lower debt levels. We acknowledge that some level of debt may be positive for certain companies, provided that there are sufficient earnings and cash to cover the interest and debt repayments multiple times. While we would expect to pay a higher price for these quality businesses given that they are superior to the market, we ensure that we do not overpay.” Fourie concludes by saying that these fundamentals should stand a well-constructed, diversified portfolio in good stead over the long term.