Will this nightmare ever end?
Question: Will you tell me that COVID-19 will end soon as my investments are losing value almost every
day? Asked at “Ask a Friend, Ask Efren” FREE service at www.personalfinance.ph, SMS, Viber, LinkedIn, WhatsApp, Instagram and Facebook.Answer: I cannot possibly accede to your request nor can anyone else. We are in almost uncharted territory with COVID-19. What we can do is make comparisons with two recent crises, first with the 1997 Asian Financial Crisis (AFC).
In the years leading to the AFC, much of the Asian countries were “pigging out.” While there was high economic growth, there were also credit bubbles, high interest rates, a large inflow of hot money into the region, crony capitalism in some countries and excessive real estate speculation. Then the combination of the devaluation of the Chinese renminbi and Japanese yen, coupled with the rise in US interest rates and decline in semiconductor prices burst the Asian growth story bubble.
While the Philippines was not as badly hit as South Korea, Thailand and Indonesia, through contagion and the country’s own doing, the peso still depreciated by 49 percent from end-1996 to 2001 while the Philippine Stock Exchange index (PSEi) plummeted by 63 percent over the same period. Philippine gross domestic product (GDP) contracted by 0.6 percent at the worst of the crisis but ended 2001 with a modest 3-percent growth. In response to the crisis, the Bangko Sentral ng Pilipinas (BSP) took action, which included raising its overnight rate from 15 percent to 32 percent at the onset of the crisis. But it would take four years before the PSEi started on the road to recovery.
Asia went on to learn its lesson. By the time the Global Financial Crisis (GFC) hit in 2007, the region was better prepared with high foreign exchange reserves and more conservative financial policies. Regional integration and open global markets deepened production networks and exports. During the GFC, it was the West that had pigged out. But again, through contagion, GDP growth for the Philippines decelerated from 7.1 percent in 2007 to 1.1 percent in 2009. The PSEi dropped by as much as 37 percent for the period. In response, the BSP again sprang into action and implemented many measures, among them reducing its policy rates by 2 percentage points.By the end of the GFC in 2009, the PSEi had almost gone back to its pre-GFC level and thereafter staged its longest bull run to date while the peso appreciated by 6 percent during the period. Fast forward to 2020. Prior to COVID-19, the BSP was already on a trajectory of lowering its policy rates and bank reserve requirement ratio. The peso has stayed relatively stable on a year-to-date basis ending April 3, 2020. Estimates are that GDP growth for 2020 will range from -0.6 percent to 3 percent. And while the PSEi did drop year-to-date, 32 percent is a far cry from the index’s near decimation during the AFC. So far, it seems that the impact of COVID-19 is more similar to that of the GFC.But unlike with the AFC and GFC, this time around, governments around the globe are arming to the teeth with fiscal stimulus packages supported by central bank monetary tools and aid from multilateral agencies. These have led some traders to say that markets may have reached peak risk levels, although the actual rebound may still take time to manifest itself.So, what should the individual investor do? Learn from the lessons of past crises.
First, unlike with COVID-19, in investing, you need to position just after the start of the curve; no need to do kamikaze trades. Second, volatility has long been the new normal and the best way to minimize risks is by managing a portfolio of securities. If you already manage one, perhaps a rebalancing is in order.Third, set a (long-term) life goal then determine the financial tool that would provide the return to best achieve that goal. Return is never the goal while risk is never the reward.
Fourth, don’t expect instant returns and don’t consider yourself a superstar with just a few winning short-term trades. Accept that no one can outperform the index while it is on a bull run. And when prices suddenly head north with the discovery of the drug to cure COVID-19 and the vaccine against SARS-CoV-2, it will serve you well to always be mindful of your long-term goals.Lastly, save. In times of crises, cash is king not only to serve as emergency funds but also to continue investing toward goals. In reality, people don’t like to save because it implies cutting back on their lifestyle. But people don’t need to like saving. They just need to be apathetic to it, which is best done through automatic debit schemes. INQ
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