The coronavirus crisis: Seven lessons from the GFC

The economic damage from COVID-19 has been compared to that of the 2008 global financial crisis (GFC).

While there are key differences between the two, the first being a credit crisis and the other being a health crisis, the nature of the economic damage shares similarities.

We reached out to seven experts to find out what lessons they learned from the GFC, and how they might apply this time around.

Cash is king says Marisa Broome from the Financial Planning Association of Australia

Cash is important. If you are needing to pay your expenses and your job or income has been reduced, having savings accessible for cash is critical.

You may have your savings in an offset or a re-draw on your mortgage or sitting in a higher earning account but you should have access to around six months of emergency money.

If you are retired and living off your superannuation, having cash in your portfolio to pay your income and not having to sell growth assets to pay your income in a down market is vital and will ensure your super actually last longer.

Regardless of if it is a retail retirement income stream offering, an industry fund or your own self-managed super fund (SMSF), you should have some of your funds invested in the cash option so you can meet your annual income requirements and will allow your growth assets to recover as the market recovers.

Think long term, says Alex Vynokur from BetaShares

The key lesson from previous market dislocations is to ignore the short-term volatility and play the long game. Warren Buffet famously said: "Be fearful when others are greedy and greedy when others are fearful". This maxim holds true today.

In a volatile and turbulent market environment (GFC and COVID-19 being the most memorable recent examples), investors are particularly at risk of allowing their emotions to get in the way of sound judgement.

No-one knows what will happen in the short term - but if you have your asset allocation right, and hold quality, liquid investments, you are likely to be well-placed over the longer term.

I would encourage all investors to maintain an element of diversification in their investment portfolios. In other words, don't have all your eggs in one basket. Incorporate global equities alongside Australian shares, and don't forget to allocate to fixed income.

Ask every question, says Matt Gaden from Janus Henderson Investors

The major lesson I learned during the GFC was to carefully question the creditworthiness of a security - whether equity or debt - to understand what truly remained of an investor's capital.

Seemingly "safe" investments became wrecking grounds of client portfolios, especially in the non-investment grade space. It certainly caused me to pause - to take stock of, and to question - a number of things in our industry.

I promised myself that for any portfolio or strategy that I represented, I would ask every question - no matter how small - where there was even an ounce of lack of clarity about the investments it held. I think that's the minimum standard that every investor should expect from fund managers.

Often the best explanation is the simplest one; real investment experts, who truly understand what they are investing in, can enunciate it clearly for the listener. So I find myself avoiding anything I don't understand the first time round and that has stood me in good stead since the GFC.

I also think the asset management industry, with a few minor exceptions, is in a much healthier place this time around.

While not every fund manager will get it right in incredibly turbulent markets, I have been pleasantly surprised to read the insights of portfolio managers who are traversing the COVID market conditions with a sound medium to long term view on behalf of their investors.

Look for a strong balance sheet, says Ned Bell from Bell Asset Management

I would say there are a couple of lessons learnt from the GFC that are relevant to the current COVID-19 market environment.

Balance sheet strength is the most important factor in a materially stressed environment - i.e. companies with excessive leverage get found out very quickly.

On the flipside, the companies with the strongest balance sheets will not only survive the drawdown but will come out the other side stronger - which is to say they will benefit from weaker competitors failing and should see more attractive merger and acquisition opportunities.

Also, beware of the 'sucker's rally' - market drawdowns associated with material economic contractions often play out through two or three drawdowns and rallies before markets bottom-out.

The relevance being that the MSCI World Index has now rallied back to levels last seen in late May 2019 while 2020 EPS estimates have fallen by more than 30%. The implication being that markets are now pricing in an unrealistically optimistic scenario where the global economy normalizes in the second half of 2020.

Finally, V-shaped earnings recoveries are usually more fantasy than reality. Post-GFC it wasn't until 2011 that the earnings for the S&P 500 fully recovered.

As far as the here and now is concerned, the sell-side has comically optimistic earnings per share estimates for 2021 for the S&P500 Index - currently 12% above the actual 2019 reported number.

Look for the beacons, says Nick Langley from RARE Infrastructure

Companies with predictable earnings are beacons in the fog and in demand when the economic realities of a crisis hit home. Utility companies, in particular, as regulated entities that earn a monopoly return referenced to their assets provide that predictability of earnings, cash flows and dividends.

The GFC started as a liquidity crisis and became an economic crisis because the liquidity issues took too long to fix. Comparisons to this crisis are misleading - in this crisis the liquidity issues were fixed by central bankers immediately.

The economic crisis caused by the lockdowns is having a much greater impact on the broader economy (as seen by the job losses) and may result in a small and medium-sized enterprises insolvency crisis in the quarters ahead. Look for the beacons in the fog.

Keep your cool, says Jamie Nicol from DNR Capital

Buy when others are fearful. The old Buffet saying is easier in theory rather than practise. When the world is panicking, people are dying, businesses are closing, it can be difficult to buy.

Keeping a calm head in a crisis and understanding the businesses you are buying means the volatility associated with the crisis presents strong opportunities. Steadily buying good businesses in the period after Lehman Brothers collapse was difficult but ultimately fruitful.

Relatedly, don't fall for market short-termism during a crisis. Equity investing is a long-term exercise. Investors can become very short-term during a crisis and this presents opportunities to think a little longer term compared to the market.

What are the quality businesses trading cheaply on near term concerns? What changes in behaviour will create opportunities for companies in the longer term?

Diversify, diversify, diversify says Michael Armitage from Fundlab

A key lesson learned during the GFC was the lack of portfolio diversification benefit in periods of systemic risk.

All asset classes fell during the GFC as the markets were concerned with the entire banking system failing. In systemic periods, only the safest of government bonds, cash and precious metals have historically provided a 'safe haven'.

Similarly, as the entire economic system was purposely idled to combat a global pandemic, investors quickly retreated from all risk assets.

Portfolios that had hoped for various factor exposure equities, or allocations to infrastructure, credit and property to provide portfolio diversification benefits were reminded what risk off truly means.

Since the GFC, a degree of moral hazard has been institutionalised as central banks have regularly interfered with various liquidity and outright market support mechanisms. Unfortunately, this interference may create a false assumption that the downside in markets will be limited and allowed for the high Fear of Missing Out (FOMO) as markets continue to march upward.

Subsequent zero interest rate and near zero interest rate environments have pushed most investors out on the risk spectrum in order to maintain longer term return objectives. We have seen this manifest in the over-reliance of growth (risky) assets within 'balanced' portfolios.

Most traditional portfolios will therefore have a high allocation to risky assets for market falls, and will rely upon government intervention to protect losses.

Instead of banking on continued government back-stops and over-reliance upon growth risk exposure, investors may be better served finding more robust approaches.

Investors should be building portfolios with less dependence on growth, which are balanced for all environments and add sources of return.

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