It may not be surprising that market volatility has soared since the COVID-19 pandemic hit, but could this also be, to misquote the famous line, the correction ‘we had to have’?

We spoke to James Whelan, Investment Manager at VFS Group, Michael Ogg, Director at Providence Wealth and David Lane, Director – Wealth Management at Pitcher Partners on whether we should have expected the financial impact of COVID-19 and what comes next as part of the ETF Securities Partner Series.

An overdue correction

At face value, COVID-19 has been responsible for immense uncertainty in markets (even aside from what it has meant for daily life), but there’s more to the story.

“COVID-19 was the trigger for valuations to adjust from inflated levels rather than the cause. Valuations ultimately matter and its never obvious what the trigger may be,” says Mr Ogg.

Long before Wuhan and COVID-19 started to hit the news, many had begun to wonder when the record length bull market would come to an end, and whether that time was now.

Mr Lane says, “We had been concerned about the general level of equity markets for some time and had been anticipating a market correction.”

From that perspective, many investors may have adjusted their portfolios in anticipation, but it is unlikely anyone could truly have been prepared for COVID-19 and the dramatic influence it has had.

“You can’t prepare for a Black Swan event (which this most certainly is) and you can’t expect one every day otherwise you’ll never be in the market. The situation with this event, as with most major calamities, is that ‘correlation goes to 1’” says Mr Whelan.

He notes the equity and bond market selloffs were expected investor behaviour in the face of uncertainty, but markets have also faced further challenges from the oil war, physical workplace disruptions and global interest rate cuts.

Managing volatility

While it is hard to create a portfolio to avoid every possible event to befall markets, investors can consider basic investment principles as an important tool to manage volatility.

“Diversification of portfolios and avoiding highly geared expensive assets provides some protection for portfolios in an unforeseen event,” says Mr Ogg.

Mr Lane holds a similar view to geared assets and says, “Leverage is one of the main reasons that investors (or traders) become forced sellers, and their returns (or losses) can be magnified in the current markets.”

Further to this, he says, “While there are always reasons to adapt to the current circumstances, a key element to being successful as an investor is to maintain a long-term core strategy.”

How a diversified portfolio looks will vary according to the investor.

Mr Whelan’s portfolios include “local and international fixed interest and bonds, thematic ETFs picked by our proprietary algorithm, tactical stock selections, protected dividend strategies and cash which is tailored to our client’s needs and risk tolerances.”

Finding the right time to buy

Some investors use volatile markets as a buying opportunity so may be wondering if now presents the right time to buy.

All three experts are wary of picking the bottom.

“One thing that never changes is human behaviour and the switch between fear and greed. It’s impossible in the current environment to form a view of what earnings may look like so trying to time entry points in equity markets is, at best, just a guess.” says Mr Ogg.

Mr Lane agrees, saying, “the focus has shifted from earnings to balance sheet…Almost all expectations of revenue, earnings and dividends can no longer be relied upon. Everything needs to be rebased… Companies with low financial leverage, quality assets and sustainable business models will be the ones to survive and then ultimately thrive.”

This isn’t to say there won’t be opportunities, but the traditional measures investors may have previously focused on won’t necessarily be right for the current environment.

While strong balance sheets are one key factor, Mr Whelan suggests long-term themes, including those stemming from the COVID-19 pandemic, can be valuable.

Mr Whelan sees a new world order from COVID-19 that will open doors for certain companies.

“We, as a planet, now have the template for what to do in a repeat event. Borders up, quarantine, work from home, order online, consume content from home. That will be (by default) the new way of life. We’re focusing on stocks and sectors that will assist that new way of life” he says.

What next? Final words of advice

“Be patient, do not panic and stay healthy,” says Mr Lane, offering a perspective for dealing with all aspects of life today.

Mr Ogg suggests to those tempted to tweak their finances, “don’t try and be a hero, make sure that within asset classes you have quality and ensure you have enough liquidity to ride through the storm.”

On the note of investment opportunities, Mr Whelan’s advice was as follows: “Get a plausible picture in your head of what the world looks like after this thing is done. Factor in the potential end of globalisation and even cheaper money at an unpayable debt. Think about what the average home and workplace will look like…Invest accordingly and don’t look at it every day.”

If a new world is coming and markets were overvalued before, perhaps COVID-19 was indeed the correction “we had to have”.