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In the last few weeks we have seen quite the rollercoaster in markets. What is going on and what should we do?

A key issue is the spread of the COVID-19 virus around the globe. What revived markets was the response from policy makers; the Federal Reserve, for example, cut rates. And that is a positive. But other issues are also at play – think of the election cycle in the US. In short, plenty of stuff to keep markets volatile in the coming months.

But how to invest? A short analogy might be useful here. When you drive a car into a fog, the first thing to do is to slow down. Some drivers activate the high-beam headlights to peer through the fog to try to get better visibility. However, the opposite is actually the case - the high-beam illumination reflects off of the fog back to the driver and makes visibility even worse. When in fog, it is better to slow down, dim the lights and follow closely what is visible, in most cases the nearside lane markings, and use those as a guide.

So it is in markets at the moment. We can put on the high-beam headlights and try to forecast how the current COVID-19 outbreak will develop. However, instead of getting more visibility, we might find this not to be the case. A better approach is to slow down, dim the lights and focus on nearside lane markings. In stock market terms, these markings are investment themes that continue to unfold irrespective of the fluctuations in the macro environment. Think of demographic trends, such as the rise of the Chinese empty-nester, urbanization, or the unfolding of new technology such as automation or the use of 5G.

Focus on what you can see and pick stocks accordingly is thus a better way to deal with the volatility than to try to estimate something that we ultimately cannot forecast. And in doing so, you don’t mistakenly blind yourself.

First published 6 March 2020.

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