By César Gimeno, CFA. Asset Allocation & Global Equity & ESG Portfolio Manager at MAPFRE
Considering how financial markets have behaved over the past few weeks, we can see how their dynamics have changed dramatically, and these movements have been sharper than in many of the previous crises the world has experienced. Some may say that everything is due to the effects of COVID-19, although the truth is that it is not just because of this.
Two major changes have been taking place over the past few years. Firstly, there has been a very significant increase in the speed of information transmission (especially thanks to the Internet and social networks) and, also, new investment instruments have been created that are available to stakeholders (ETFs, in particular). These two factors are very different from those of years ago, such as when the 2008 crisis occurred.
Thus, when something as significant as COVID-19 takes place, the chain of transmission between facts and financial markets is much more direct. When the virus begins to spread, everyone becomes much more aware of the situation—not only because of the speed but also because of the wealth of this information, despite it not always being of the best quality—and, therefore, different measures can be taken accordingly. And this, of course, affects savings and investment decisions.
In recent years, products have been developed that enable people to act simply and directly in a large part of the market, and these have been offered on a mass basis to both retail and institutional investors. There is therefore a new channel for action that does not differentiate between some companies and others. As a result, the effects of COVID-19 have been amplified, generating volatilities never before seen.
The proliferation of these instruments is a consequence of technological development and there is no doubt that technological development is synonymous with progress, also in the financial markets. Although it is true that when an event such as this takes place, there is a shock between the demand and supply of these products, whose performance moves away from economic fundamentals. As a result, they exacerbate the fall in asset prices, and firms are then cut off from a number of funding sources.
In such a scenario of high uncertainty, our recommendation is based on not radically changing our investment strategy, which has cost so much to design, and which takes into account the acceptable risk level as well as the investment horizon. Volatility, unfortunately, is here to stay in this new world, and COVID-19 is not singularly to blame.