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Contemplating Covid: Investor Behaviour and the Pandemic

Mike McNaught Davis 24 January 2022

As crises go, Covid-19 is right up there. World wars aside, the only immediately comparable crisis of the past 80 years or so has been the global financial crisis (GFC).

But two dramatic crises in 12 years?

Some people, particularly those most affected by both, could conclude that we are a cursed generation.

With Covid, we have experienced the worst pandemic for 100 years and the first ever lockdown of our economy. Investors’ psyche is fragile and easily disturbed at the best of times. Covid has just traumatised it again.

History typically shows that in the first instance, investors always make a quick-paced beeline for safety.

However, also true to form has been the gradual re-emergence of the braver investors, from their respective lairs, ready for action.

As ever, the quivering dial on the investor-psyche measure has swung between fear and the section marked BONANZA.

But if market reactions have been broadly predictable so far, is Covid-19 different? And if so, what impact might it have on longer-term sentiment?

The ‘rhymes’ of history

History, while not exactly repeating itself, does seem to ‘rhyme’, (as Mark Twain allegedly pointed out).

The GFC, the bursting of the dotcom bubble, and the 1987 October crash all experienced a similar pattern of quick and dramatic falls, featuring panic-levels of selling, followed by a steady and more drawn-out recovery.

What of changes to behaviour? Unexpectedly perhaps, each crisis produces a bonfire of the prevailing habits that preceded, and indeed led to, the crisis in the first place. The dotcom crash of 2001 saw a massive aversion to speculative and expensive growth stocks, and a reversion towards previously ignored value stocks.

Gone and out of fashion went stocks with no assets and earnings to speak of, and back came the unloved asset-heavy and predictable earners. The GFC saw a similar reaction to growth stocks, with the rally out of the crisis again being led by value.

As the seeds of the GFC came from the risk-taking of the financial sector, investors understandably stayed away from financial stocks for a long time after that crisis. Regulatory change forced banks away from their previous cavalier lending habits and towards a collective bolstering of their balance sheets.

Banks and financial institutions have, consequently, become stronger, if less profitable.

Looking back to look forward

Looking back further in time, the period of hyperinflation in Germany in the early 1920s led to a deep aversion to inflation and subsequently to a financial prudence among Germans that is still prevalent today.

A balanced budget has been written into the German constitution, and it is only in the past month or so that Germany has raised debt again on a substantial scale to deal with the current crisis.

In the Great Depression in the early thirties, the failure of the US government and the central bank to do ‘what it takes’ early on caused the crisis to run for longer and far deeper than it should have. This lesson was clearly learned when the GFC came around.

With Covid, it is still early days, and the consequences are still unfolding. The full economic implications may well take a lot longer to play out. Much would seem to depend on a return to normality. People often only feel confident once a semblance of their previous life has been re-established.

What will change?

Risk aversion has been an obvious and expected consequence of Covid-19. But there are other clear changes, not least a rise in the savings rate.

This is completely logical, both because shops and services have been closed, and because – amid the threat of job losses and recession – people have been very cautious about spending.

However, this rise in savings could well become a habit. The consumerist addiction, so prevalent in this country, could well evolve into a more sober mindset, and an attempt to live within one’s means.

Demonstrating this point, a record £7.4bn of credit card debt was paid off in the UK in the month following initial lockdown.

Another potential consequence might be greater interest in our finances. Many of us tend to tie money up in savings accounts, ISAs and stock market funds (passive and active) and forget about them – hoping the professionals and markets will work their magic.

Too much money sits in zero or near-zero earning accounts. With the old medicine of quantitative easing back in favour, zero interest rates could be with us for a long time.

Additionally, many will have noticed that while a lot of sectors got trashed in the downturn, some sectors like technology have had a fantastic crisis! In this environment, many investors may be tempted to get more active in choosing their stocks and funds, and less reliant on passive funds.

This may, in turn, accelerate the already visible and secular move to online investing and accounts, rather than deter it.

Having been under forced incarceration for some months, we have all become used to remote working and living. Transacting online (shopping, banking, holiday banking) has become a necessity. Again, this was an existing evolution.

However, it has undoubtedly been fast-tracked. Do we really need bricks and mortar banks, travel agents, even certain shops?

We will emerge from this crisis at some stage. History shows us that.

We are a resilient species and hard-wired to adapt and change. The pattern of crisis and recovery in stock markets terms may not be too different from previous crises. But our behaviours and the way we live our lives will be subtly, and not so subtly, altered.