Are we nearly there yet?
It is with grim fascination that I have been following the unfolding Covid-19 pandemic and its impact on the stockmarket. Fortunately I sold a significant portion of my investment portfolio at the end of February . Unfortunately , I did not sell the majority. What is in store for the period ahead? When will we reach the bottom?
The FT regularly updates it's graphic at https://www.ft.com/coronavirus-latest showing how the virus is spreading. This has shown a Chinese problem, spreading in a limited way to Asia, then to Italy and Iran, and then onwards throughout Europe and to the USA. I have also been following the Government briefings and was interested to hear Jenny Harries' explanation as to how the response is being framed based on the Imperial College report (https://www.imperial.ac.uk/media/imperial-college/medicine/sph/ide/gida-fellowships/Imperial-College-COVID19-NPI-modelling-16-03-2020.pdf). What I took away was the image of a sine wave in between two tramlines and the thinking that as the lockdown took effect with a lag, the pressure on the NHS would ease and so we would be able to relax the lockdown. It seemed that we could expect several cycles of this lockdown but this was not entirely clear. This led me to read an excellent FT Alphaville article by Jemina Kelly (https://ftalphaville.ft.com/20... -this is behind the paywall) and then the Imperial College report.
Weekend comments by Michael Gove and Jenny Harries point to longer timescales than the current three week lockdown. Michael Gove telling Sky that the lockdown may become more stringent and Dr Harries that it could be six months before UK life returns to normal.
The Imperial College report shows is the following graphic on page 12 which interestingly has a timeline attached (something that the Government answers during the briefing sessions have repeated ducked until this weekend):
This appears to indicate the statistical modelling of a rolling series of lockdowns of various lengths and shows that the current three week lockdown which began last week will run to the beginning of July when it will be eased (by relaxing social distancing of the under 70s and reopenning schools and universities) and then reimposed for two months, is eased again, .................. This continues until a vaccine is found.
Certain other actions are being taken by the Government and others which we might expect to change the analysis:
- have we added more ventilated hospital beds? The Nightingale Hospital programme seems to be doing this.
- what will be the impact of increased testing, especially if we have an effective antibody test to detect those who have recovered from the virus (both having had symptoms and been asymptomatic)? On 25 March, Professor Sharon Peacock, director of the National Infection Service for Public Health England confirmed that an antibody testing kit could be ready for general use within days “not weeks or months”, as previously believed.
- how compliant will the public continue to be with the lockdown?
- will seasonal factors impact the spread of the virus?
- how will other countries respond and will there be a better model to follow? South Korea's response seems to have been highly effective to date but they have been much better prepared due to their experience with SARS and we are perhaps too late in this pandemic to follow their model.
- more data will be gathered which may change some of the underlying assumptions within the model. A model has been published by Oxford University with different assumptions and radically different conclusions, highlighting the sensitivity of the modelling to the assumptions being made. The ramping up of testing in the UK will likely raise the number of cases as more will be recorded.
We don't know at this stage what this means for the Imperial model, and I am not aware of an update having been published.
One big question that I have which stems from the title of this piece is 'Where is "There" ?' At this point in time it is very difficult to assess what the bottom will look like, but it appears to be a worse place than that incorporated into stock prices despite the falls to date. The Government's various support packages are generous but will be far more expensive if they have to sustain the economy for 18 months and few businesses seem capable of surviving for that period of time with rolling lockdowns despite receiving that support. The Government support will also need to be paid for at some stage through higher taxes.
On this basis my strategy has been to buy £3UKS EFT, which moves inversely to the FTSE100 by a factor of 3x, when the market rallies with the hope that I am able to sell towards the bottom of each down leg. I am normally a "buy and hold" investor and I will be interested to hear how I can refine this strategy as this is quite an alien thing for me to do, especially with the current levels of market volatility. The main objective is to shield the remainder of my investment portfolio from significant drawdowns.
None of the above should be taken as advice. The purpose is to stimulate debate and enable me to learn.
My thinking has focused mainly on the UK but I am acutely aware of the fact that the US stockmarket often influences other markets. In the UK we appear to have a coordinated response to a difficult situation and benefit from a National Health Service. In the US, the position appears much more chaotic and they have a series of health businesses not a service. The implication is that this could well have a worse impact in the US than the UK but that there could be consequential impacts on UK stock prices.
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8 comments
Many thanks for the comments which have been very useful.
I understand the risks but feel that a bear market calls for a different strategy to that normally adopted. Capital preservation becomes paramount but it is now too late to move into cash. I accept the limitations of the short EFT especially in relation to compounding but it has the advantage of being accessible through my existing stocks and shares ISA accounts.
I firmly believe that the recent market rise is a "dead cat bounce" in a larger market fall and that we will see at least a retest of recent lows and probably worse. EPS forecasts from brokers have not begun to recognise the impact of many businesses have no revenue for a substantial part of this year and the difficulties of rebuilding supply chains as different countries come back on stream at different times. Government support will help but it will not prevent a large number of businesses going under.
I continue to remember the Maynard Keynes quote mentioned in @Julianh 's post. I seem to recollect that he was technically bankrupted trading currencies in the 1920s
Many thanks for this interesting article. I am following a similar path. My comments below are largely in response to the other comments on your article that discourage the use of short ETFs
I have also read the papers that suggest that short ETFs fail to fully mirror the index that they are mirroring. I am not yet comfortable with Spread Bets or Contracts for difference so for now I am hedging my share portfolio using short ETFs, but only x1 shorts not geared shorts. To give me confidence in these products I have created a small spreadsheet to monitor the performance of the short ETF vs the performance of the inversely tracked index since 19/02/20 (when the markets started to fall). So far the two short ETF's that I am using the most have gained more than the indexes have lost (even through the recent bounce). The two short ETFs that I have been using are WisdomTree FTSE 100 1x daily short (SUK1) and WisdomTree FTSE 250 1x daily short (1MCS).
I am concerned at the other risks of short ETFs. They attempt to inversely track the market using a variety of complex derivative instruments which may or may not continue to work. So there is a counter-party risk inherent in using these ETFs. As far as I know (please correct me if I am wrong here) spread bets and contracts for difference have similar counter-party risks. Having said which, I am going to learn more about these instruments (starting by using a play account at IG) and am also diversifying to other short ETFs (e.g. X-Trackers and Proshares shorts on US indices).
As for the market:
1. the news is almost universally bad
2. companies are going to go bust even if government support reaches its intended destinations
3. my guess is that markets have quite a bit further to fall
4. But markets can stay insane for longer than we can stay solvent (rough quote from John Maynard Keynes)
If you want leveraged short on the FTSE simply SB it, tax free on an SB or tax deductible on a bad call via a CFD. There are numerous articles out there that explain why short ETF's fail to marry with their respective index. just seems far too complex to me.
Having said all that, be very wary on any leveraged product, you need to know what you're doing, it is very much not like buying equities, you will be tested emotionally and probably financially too.
This article suggests that buying leveraged short ETFs is an act of financial folly:
https://monevator.com/short-etf-maths/
I'd take care with this little beast £3UKS - even if you're pretty certain that you've got the overall trend right it can whipsaw like a ferret on a string (not sure that's an expression but hey ho). And annoyingly the ETF price drops tend to stick whereas the gains tend to slip. I wish you luck and I hope you've got a cast iron constitution. My preferred option is X FTSE100 SH ETF (LON:XUKS) - ungeared and easier to manage.
I hold some £3UKS I could not understand on Friday when the FTSE 100 was down 5.25% but this was only up 5.99%, the £2UKS was up over 9%, does make sense to me.
What happens if a new cobination of anti-viral drugs is announced? Or a new test for COVID immunity? Or a vaccine breakthrough?
There might be a vaccine breakthrough, but there's little chance of it in less than the 12 months quoted. Testing would need to be extensive.
Antivirals might be shown to work any time, but unlikely to be a game changer in the near future given the scale of the problem.
Antibody (presumed immunity) testing will be a game changer, but the pace of the change will be limited by the number of survivors which is being kept down by the current delay policy.
Well, I can think of a number of things that might keep you awake at night with the above strategy:
- The primary UK index is heavily influenced by some factors other than broad business confidence: GBP Currency movements impacting overseas earnigs of its constituents, Oil & Gas prices, Industrial Metals prices. What happens if Sterling plunges? What happens if the Russians and Saudi's kiss and make up?
- We are in a crisis that requires policy intervention. The US Government has already twisted the rules of the Federal Bank to allow it to buy Corporate Bonds. How long before the rules are changed to allow it to buy ETFs in the same way as the Japanese central bank? And if the Janpanese and US Fed can do this, how long before the BoE follows suit?
- I know there has been a dearth of good news. But what happens if there is some spectacular good news announced overnight when the markets are closed? OK, so at least with that leveraged product you cannot lose more than your stake - unlike a spreadbet or CFD. What happens if a new cobination of anti-viral drugs is announced? Or a new test for COVID immunity? Or a vaccine breakthrough?
So, my words of caution would be:
- Day trade only. No overnight postions. No over-weekend positions.
- Obey your rules on position sizing.
- Sit in front of your computer all day.