All market corrections are different and have different causes, and the one currently being experienced has been notable for both its scale and speed, and for the fact it is being driven by a health emergency rather than a financial one.

The simple fact is many investors will have been caught off guard by the events of the past month.

In this article we will provide some ideas about how to get through the current volatility with the least amount of damage to your wealth as possible.

We offer suggestions of what to do based on various personal circumstances as well as provide some expert insight into these extraordinary times.

SORT OUT YOUR FINANCES

First of all it is worth going back to basics. With many of us stuck indoors, there is an excellent opportunity to set some time aside to sort out your finances.

Start by measuring your regular incomings and outgoings. Most of us now have online banking so this should be a straightforward process but paper copies of your bank statements are fine too. Look back over the last 12 months
and identify the biggest expenses. How many are truly necessary?

Do you have sums sitting dormant in forgotten savings accounts or a number of disparate pension schemes accumulated over the course
of a career?

Consolidating could lead to substantial savings. It is also worth shopping around to get the best deals on insurance and utilities. All of us will have levers we can pull to run a more financially efficient household.

Once you’ve done this it is worth returning to your short and long-term savings goals. Doing so will help you block out at least some of the alarming background noise and focus calmly on what you are trying to achieve. It will also give you an insight into how much the last month has set you back and the steps you need to take to get yourself back on track.

Anyone who is worried about their job security should not be putting money into the markets at the moment unless they’ve already got a substantial buffer of emergency cash savings.

WHEN WILL THE PAIN BE OVER?

It remains hard to say when markets will bottom out. Governments and central banks have loaded up their big guns and fired huge amounts of stimulus and support to mitigate the impact of lockdown measures and to try and keep their economies afloat.

There are three things which will be worth watching in the coming weeks:

– Are containment measures working and what progress is being made on the medical front?

If we start to see that attempts to suppress the virus are working and the daily rate of new infections and deaths is coming down, this will help provide a bit more hope for a sustainable economic rebound soon after.

The market will also be watching for improvements in testing for the virus, including an antibody test which could confirm if you have been infected at any point. Further points to watch include increased capacity in medical systems to cope with surging demand as well as the efficacy of new coronavirus treatments.

– Has market volatility settled down?

One of the first signs that markets are back on an even keel is likely to be a reduction in volatility. The VIX index, the main measure of market volatility, is below its highs but still at elevated levels. If we can see a few days of more steady movements (up or down) in stocks this could be an encouraging sign.

– Can China show the way out?

China is beginning to relax the strict restrictions it put in place when the coronavirus first emerged in January. Many observers will be watching their exit strategy from lockdown conditions closely. If there is not a new spike in infections this will offer considerable hope to countries around the world.

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WHAT IF I'M IN RETIREMENT OR ABOUT TO RETIRE?

We appreciate the situation is more complicated and difficult if you are nearing or are already in retirement.

If you are approaching retirement, you may have already benefited from moving more of your portfolio into lower risk assets like bonds. However, if you are still heavily invested in stocks and shares it probably does not make sense to sell now.

If, for example, you sold all your investments and bought an annuity at retirement, you might be crystallising losses at the market bottom and buying a product offering very low rates of return (see table), even if it does provide the certainty of guaranteed income.   

If it is an option, you could consider putting retirement plans on hold until there is a bit more certainty on the outlook for equity markets. This could also allow time to claw back some losses once the coronavirus outbreak has been contained.

If not, one option at retirement might be to enter drawdown, i.e. remain invested in retirement and take an income from your investment pot.

If you go down this route or are already in drawdown and take money from your investments to fund your cost of living you could fall victim to so-called ‘pound-cost ravaging’. This term is used to describe the impact that a downturn in financial markets has on investment withdrawals.

When you take money out of your pension you sell down your fund to generate income, unless you are simply withdrawing cash from dividend payments, something which is likely to prove more difficult given the recent wave of dividend deferrals and cancellations announced by companies. Later in this article we look at where you might find income in the current environment.

As the last few weeks have highlighted, market values change regularly and to generate a specific level of income you’ll sell down part of your pension fund depending on its value.

For this reason there is a strong argument for drawing on any cash you have instead for the time being, such as in an ISA or bank/building society savings account. This would provide you with
some money and give your investments more
time to recover.

Ultimately these are only hypothetical scenarios without taking into consideration individuals’ different circumstances. It might be worth reviewing your retirement strategy with the aid of
a qualified financial adviser if you can.

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WHAT SHOULD YOU DO WITH YOUR EXISTING INVESTMENTS?

If you are already invested in the stock market, and do not need to access your capital in the short-term, then try and stick with your investments rather than sell them at depressed prices.

For example, anyone who recently sold a FTSE 100 tracker when the index hit intra-day lows below 4,900 would have missed out on a recovery rally which, as we write, runs to some 14%. There’s a reason people often say that time in the markets beats timing the markets.

As fund manager Charles Montanaro observes: ‘While the situation may well worsen – both in health and economic terms – we would caution against selling. It rarely pays to run for the hills after the market has fallen.’

Canaccord Genuity Wealth Management’s chief investment officer Michel Perera underlines this point. He says: ‘It’s not totally impossible that once the markets feel the virus is under control, you could have a rally that could be up to 20% in one day.’

Doing as little as possible does not mean doing nothing, however. You should consider running a health check on your portfolio. The tone of recent trading statements from listed businesses has strikingly focused on their short-term liquidity, or
in other words do they have enough cash to get them through hard times?

You do not want to be owning financially distressed companies. Many investors have already worked this out and those firms with weak balance sheets have seen their share prices marked down accordingly. 

However, given the levels of uncertainty on just how long the current economic conditions might persist do not be tempted to hold on to a heavily indebted company just because its share price is bombed out. In the worst case scenario, i.e. the business goes bust, you could be left with nothing.

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How to read a balance sheet

The balance sheet can help tell us how much a company is worth, how healthy it is and whether its shares reflect these factors.

It deals with two concepts: what a company owns (its assets) and what it owes (its liabilities).

Assets come in different flavours: perhaps the key ones being ‘fixed’ and ‘current’.

As a rule-of-thumb fixed assets are anything that will be around for a long time, like factories and land, trademarks and money already spent on research. Current assets are things like stock and cash in the bank.

Liabilities also have different guises: ‘long-term’ and ‘current’. Money not due to be repaid in the next year is considered to be a long-term liability. Money due within the year is a current liability.

Remember companies go bust because they run out of money, not because they can’t sell their products or services.

Take a second to divide current assets by current liabilities. This is called the liquidity ratio – anything less than one and your company is facing a cash crunch.

Better still, take current assets and remove the value of stock and inventory, which can be difficult to shift in an emergency, then divide
that figure by current liabilities.

This is known as the acid test or quick ratio, and is considered to be one of the best crude tests of a company’s short term viability.

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WHAT IF YOU WANT TO PUT MORE MONEY INTO THE MARKETS?

If you already have an emergency cash pot and money left over to invest then now might be an attractive time to invest in stocks, although no-one knows if markets will go up or whether we’re going to see another big spike downwards.

Canaccord’s Perera says: ‘If you’re sitting on uninvested cash, now is a good time to buy. The markets might fall further, but you want to be in on it for the upside. Once they are on the up, the likelihood is that they will rocket.’

If you want to start investing or put more money into an investment portfolio there are some things to consider. One is regular investment which could have a number of advantages in the current environment. Here you would invest a set amount in the same investment each month, typically with lower commission charges on these trades than you would pay for a lump sum trade.

Regular investment ensures you are invested in the market no matter what direction it is moving in and you avoid taking emotional investment decisions.

When markets are falling it is easy to let emotions take over, because you might be nervous and reluctant to put money into shares. In the short-term this might protect you from losses but you could also miss out on returns when stocks rebound. By investing on a monthly basis you will be well positioned for a recovery when it comes.

During periods of volatility, investing regularly could also see you benefit from an effect known as ‘pound cost averaging’. This term refers to the way regular investment can iron out the ups and downs in the price of a fund or share over time, as you essentially end up buying a greater number of shares when the price is lower.

There is nothing to stop you from also investing lump sums alongside your regular investments as part of a balanced strategy.

RESEARCHING IDEAS IN THE CURRENT CLIMATE

The above helps answer how you might invest; what you should invest in is a more complicated question.

Shares will continue to provide a range of investment ideas in the coming months. Some of the key criteria we will be applying include:

• Does the business have a sound balance sheet?

• Does it convert earnings into free cash flow?

• Is it well adapted or can it adapt to a post-coronavirus world with moves towards buying services and goods online accelerated, likely greater adoption of home working and increased levels of automation?

• Does it have strong barriers to entry?

• If it is reliant on a supply chain, how robust is it?

• Does it have good governance and high levels of transparency in its communication with
the market?

You might have to accept that your investments won’t go up instantly or in a straight line. They could even fall further. As the well-regarded fund manager Nick Train says: ‘If you are a partial owner of something exceptional or valuable then you give yourself the chance of good things happening to your portfolio, although you can never be sure exactly when.’

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HOW DIFFERENT INDUSTRIES COULD SHAPE UP IN THE CORONAVIRUS CRISIS

In a report on the market in the wake of the coronavirus outbreak, Morningstar has identified some key sensitivities and trends facing different sectors.

TELECOMS

It believes opportunities may have emerged in the telecoms sector given its relatively modest exposure to the effects of the crisis.

HEALTHCARE

Demand for healthcare products is expected to remain robust given inelastic demand and providers of streaming services are expected to
see some upsurge in demand with consumers tempted to try new offerings.

TRAVEL

On the much more heavily impacted side, a recovery in the airline sector is expected later in the year. Morningstar comments: ‘We continue to believe that once coronavirus fears fade, air traffic will improve and could overshoot normalised demand for a period as pent-up demand (for example, postponed family vacations or business conferences) is released.

‘Despite weak short-term earnings, we anticipate the travel downturn to be short-lived and firms with strong balance sheets to be able to weather the storm.’

BANKING

A repeat of the financial crisis for the banking sector is not expected. It says: ‘Banks were hurt to an unusual degree during the global financial crisis, but there were systemic issues at play and capital levels were too low, causing the need for equity capital raises.

‘Once a bank gets to a point of requiring capital infusions, permanent impairment of capital is occurring for shareholders. Currently, we don’t see a systemic financial crisis brewing, and as such,
we don’t expect permanent impairments of capital to occur.’

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WHERE TO FIND INCOME WHEN DIVIDENDS ARE BEING CUT

With so many companies cutting dividends as they respond to the coronavirus, investors in many stocks will have to start looking elsewhere for income.

Income funds, which at least benefit from diversification, will also be heavily affected and are almost certain to deliver lower dividends in 2020.

THE VIEW FROM EVENLODE INCOME

Hugh Yarrow, who manages TB Evenlode Income (BD0B7D5), says: ‘Though a resilient portfolio, I think it’s important to manage expectations on the short-term dividend stream for the fund (i.e. over the next year).

‘(Our) portfolio has entered this crisis with a healthy level of free cash flow cover relative to dividends, some very strong balance sheets across the portfolio and a bedrock of repeat-purchase business models. This should provide a strong underpin over the coming months.’

He adds: ‘The Evenlode Income portfolio won’t be entirely immune from pressure on cash flow and dividends given the extremity of the current situation... As a result, it may well be (unless this crisis begins to resolve itself relatively quickly in
the next few weeks) that the fund’s dividend stream falls somewhat over the coming year.’

THE VIEW FROM ARTEMIS INCOME

Adrian Frost, co-manager of Artemis Income (B2PLJH1), says that although the prospect of lower dividends is worrying, his portfolio generates its income from a broad spread of companies.

‘Much of our time has been spent – and will continue to be spent – on the most affected parts of the portfolio and in understanding those companies’ ability to weather the crisis. The fund’s positioning and composition has changed little through this period other than through the impact of share price moves. Our only move of note (prior to the sell-off) was to further reduce our already low weighting to the oil and gas sector.’

ADVANTAGES OF INVESTMENT TRUSTS

In theory, investment trusts should be better placed as they can hold back 15% of their dividend income to create a cash buffer to cover lean periods.

The table shows the income funds who can cover their dividends for the longest period in terms of years. However, times don’t get much leaner than this and the current period may test the ability of trusts to sustain current levels of payments, even though a large number of trusts have long track records of increasing the dividend.

THE VIEW FROM HENDERSON HIGH INCOME TRUST

David Smith, who steers the Henderson High Income Trust (HHI), says: ‘The trust will clearly not be immune to dividend cuts but having a well-diversified portfolio and a bias towards quality companies with the addition of owning some bonds will help limit the impact.

‘Also the trust’s revenue reserves, which have been built up over the last few years, has the potential to provide further support to our own dividend. 

‘In the recent market sell-off we have been adding to companies that have a more defensive profile that will be impacted less by government containment measures thereby sustaining dividend payments.’

Its portfolio holdings include British American Tobacco (BATS), Reckitt Benckiser (RB.), Bunzl (BNZL) and French pharmaceutical company Sanofi.

He adds: ‘We have also utilised our ability to go overseas and initiated new positions in businesses such as Coca-Cola and the Finnish telecoms company Elisa, where we think dividends will be sustainable.’

INFRASTRUCTURE AND MULTI-ASSET FUNDS

Infrastructure funds should benefit from predictable long-term revenue streams to underpin dividends. For example, GCP Infrastructure Investments (GCP), which invests in a range of UK infrastructure projects, is currently trading at a 4.3% discount to net asset value.

Investors might also want to look at multi-asset funds as these invest in a range of different asset classes and not just shares. The range includes Premier Multi-Asset Monthly Income (B7GGPC7) which invests in a range of funds including the aforementioned Evenlode Income as part of its equities exposure, as well as ones that invest in corporate bonds, property, emerging markets debt, overseas equities and cash.

DISCLAIMER: Editor Daniel Coatsworth has a personal investment in Evenlode Income referenced in this article.

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