Investors can reap the rewards in next three years if they hold their nerves now, says SilverCross
The sell-off around the world sparked by the coronavirus crisis is so rare and extreme in nature that it is likely to be followed by a significant recovery if it follows historic trends, according to global small-cap investment specialist SilverCross.
This year has so far been dominated by the spread of the coronavirus across the globe, sparking the fastest downturn on record for markets and economies.
Investors are rightly concerned about what comes next amid record job losses and expectations of the collapse of many businesses.
However, Chris Andrews, co-manager of the top performing SilverCross Global Small-Cap fund, says the size of the sell-off we have seen in equity markets such as the US are rare, and are almost always followed by recoveries which generate significant returns over the next three years.
“We can’t predict the future and we don’t try to, but what we can do is point to the data from previous falls of this magnitude,” he says.
“Every time stock prices have fallen by 30 per cent or more from the top, they have proven to be a fantastic buying opportunity, with prices almost always higher three years after.”
Co-manager David Simons points out that since 1929 there have been six crashes where the S&P 500 fell more than 30 per cent, with the last two coming in 2002 and 2009.
If investors had bought the S&P 500 on the first day it traded 30 per cent below the high, regardless of any further falls, they would have made positive returns each time, with the one exception being the 1929 sell-off itself which sparked the Great Depression.
“As with all crises and downturns, this one will also be temporary,” Simons says. “Bad news will be followed by good news, and the significant volatility in share prices provides opportunities for bottom-up stock pickers.”
Amid the volatility the SilverCross team has screened companies in the portfolio most impacted by the coronavirus, evaluating their liquidity and how long they would be able to survive with no revenues, and making changes to the portfolio to reflect that.
“For one of our top ten holdings as of the end of 2019, our assessment in March led us to conclude the risk of permanent capital loss outweighed the potential reward, and that holding was sold,” Andrews said.
“However, we have also been patiently waiting for the market to present us with a buying opportunity. We have a shortlist of high-quality companies for which we have completed all the research in the past, and these opportunities came in March, with three new companies added to the portfolio.”