Ask Mark Mobius! is a new feature on markmobius.com, where we curate questions asked by readers and investors for Mark to answer. These will be published on a regular basis. If you like to ask Mark a question please send an email to firstname.lastname@example.org. While Mark might not be able to answer every single query we will try our best to get as many questions answered as possible.
MM: Thanks very much for those kind comments. The markets in Latin America have seen a downturn in view of the current crisis as investors, both domestic and international, exit to seek safety in cash. The extent of the global panic caused by the coronavirus outbreak is extremely high and markets have suffered accordingly.
I have just done a study on the average downturn of markets since 1987. That study showed that during that period the average bear market drop for Brazil, for example, was 56%. Given the fact that Brazil’s market is down about 46% up to now, we are getting close to that average but, as you know, averages are just that and the range can be wide. Brazil experienced the largest drop between 2011 and 2016 when its market fell by 78%. (These are all USD numbers.) So we cannot be sure that Brazil has been beaten enough, unfortunately.
MM: It doesn’t look that way. I think that health experts and scientists within the U.S. Government realize that they must cooperate closely with China in order to learn from the Chinese how to contain COVID-19 so, if anything, this cooperation could lead to better relations between the two countries. Nevertheless, the Trump administration will continue to seek trade and technology concessions. That will be a lasting and long term preoccupation.
MM: The experience of being isolated at home may not be a very good experience for many people and after the crisis is over and they return to work or meet their friends again, many will appreciate the importance of direct human contact. Video conferencing, in my opinion, has not yet developed to the stage where it can replace in-person contacts. In addition, the self-isolation might lead to people assessing their true goals in life and reflecting on the meaning of what they are doing.
MM: The big difference between 1929-30 and today is that today central banks are pumping money into the economy at a terrific speed and banks are creating money at a high rate. During 1929-30 with the gold standard (which Roosevelt eventually abandoned) it was impossible for the Federal Reserve to increase the supply of money beyond what gold was in the US vaults. So the Federal Reserve’s tight monetary policy is given as one of the causes for the Great Depression. Also, there was no deposit insurance system in the US at that time so when panic set in there was a run on banks resulting in a banking system crisis and further tightening of money availability.
MM: I’ve just done a study of 11 markets since 1987 – the bear markets – and found that on average bear markets last a little less than two years and go down an average of about 50%. So given the severity of the current panic, we are probably not at the bottom. But please remember these are averages. Many bear markets went down far less than 50% so it’s probably a good idea to assume that this is a time to start nibbling but leave enough firepower to continue buying if the markets retreat more. The critical question is not what the bottom is but how long it will last. So you need the cash reserves to continue to gradually buy and hold for what may seem like a long time. I like the dictums given by John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent." And “It is better to be roughly right than precisely wrong.”
MM: Per the above, a 50% drop is about the average in many markets since 1987 but there are, of course some instances where the drop was more than that. Nevertheless a drop of 50% is probably an opportunity to buy gradually provided that you are buying stocks with strong balance sheets, which pay dividends, have a good return on capital and are managed by competent people. But that does not guarantee success so you should really do your own study since my recommendations may not be the best.
MM: We can’t blame China just because the virus started spreading there. Viruses are everywhere and other harmful strains could originate elsewhere in the future. What we should now expect of China is to intensively cooperate with other countries around the world to develop vaccines and treatments so the entire world can benefit from their early experience of the diseases.
MM: The good news is, there is no food shortage in terms of staple foods according to the FAO, in fact, crops were good this year. And in most cases governments have been careful to protect food supply chains so, except for cases where there is hoarding going on, we will hopefully not see food supplies being badly interrupted. However, the supply chains of some labor intensive commodities such a fresh fruit and vegetables might be affected stronger by the current crisis. Many of these products rely on humans for harvesting and if these people cannot get to work because of health issues or lockdowns that might create a shortage. Governments need to be aware of this and keep the supply chains moving from production to logistics, and that includes making sure that essential commodities keep moving swiftly even across closed borders.
MM: The draconian measures taken to contain the spread of the coronavirus are going to have a big impact on numerous companies globally. In fact, the cure may be worse than the illness since many poor people around the world could lose their incomes and might be left without means to pay for health care thus exacerbating the crisis. That is why “helicopter” money i.e printing money and handing it out to individuals seems to a good solution. It gets money directly into the hands of the poorest. In addition there should be subsidies for companies, particularly small and medium firms, to help them keep their staff and survive the current slowdown of economic activity.