The Madness of Crowds

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17/03/2020
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There have been many frenzied panics over the years, which in retrospect are worthy of a mention in the history books, but the world carried on afterwards.

It is noteworthy that there have been fewer daily coronavirus fatalities in the whole of China than there have been in Italy for each of the last seven days (9 – 16th March)*, and as of the time of writing, now the rest of the world. We are hearing that some sense of normality is returning to Singapore and Hong Kong via our business links to these regions, with strong evidence of successful virus containment. This is reassuring because it means this thing can be stopped if the human will is there even if the autocratic system of government isn’t.

As for the markets, not surprisingly they are on a rollercoaster ride. The best strategy is always to stand well back in these situations, perhaps deploying some cash if you have the luxury and are able to take a long-term view. We can rest assured that 2020 will be associated with the coronavirus for eternity just as 2000 is recalled for the technology bubble and 2008 for the credit crunch. These are all events that caused billions to be wiped off equity markets and a real sense of fear and panic. Arguably, the bursting of the technology bubble was a fear of losing money more than anything else whilst the credit crunch was the fear of the end of capitalism as we know it as the banking system came close to collapse. The market fear surrounding the coronavirus (Covid-19 to give it its correct medical name) is not so much of the mortality impact but more the impact of the economic curbs to control its spread. This is why G7 Finance Ministers need to act decisively and come up with a fiscal spending plan that keeps businesses afloat for when they inevitably experience cashflow seizure. The creation of Quantitative Easing saved the banking system back in 2008 which was caused by the FED allowing Lehman Brothers to go bankrupt. Surely now is the time to come up with a huge fiscal support plan which can be deployed around the world following the inevitable restrictions on labour mobility and the associated economic fallout.

Over time, crowd mentality goes through several phases of psychological behaviour depending on the inputs. This can move from relative optimism to excitement as equity markets and economic prosperity boom, often peaking with a sense of thrill and even euphoria. We saw this around the time of the technology bubble when profits were viewed as old school, revenue being all that mattered. As soon as cracks started to appear in these assumptions, anxiety appeared followed by denial and then real fear set in, followed by desperation, panic and capitulation.

As the markets are currently experiencing the worst period since the last epidemic of fear in 2008, there will be a period of irrational selling capitulation followed by despondency and depression. We are perhaps not quite yet at that stage as outside of Italy, the west has not yet experienced the same as China. The point of capitulation could well be approaching as the markets are now over 20% lower which is the technical definition of a bear market. The bursting of the technology bubble and the credit crunch both caused a 50% fall from peak to trough but as with all events of this nature, there is no historical precedent from which to gain perspective**.

Logic tells us that this will be a short-term phenomenon perhaps reducing global economic growth significantly until June, when seasonality will hopefully stop the virus in its tracks, as is usual with flu-type epidemics. Human psychology should then move forward to hope, relief and optimism once more as the economic cycle kicks in.

Our advice is that now is the time to remain calm, hope that the G7 will come up with a fiscal plan and then enjoy the recovery as relief sets in. Until then, try not to watch the market too closely and focus more on reducing your chances of getting the disease.

*Source: New York Times 2020

**Source: FTSE International Limited ("FTSE") © FTSE 2020. "FTSE ®" is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

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