Don't let a crisis detract you from your long-term strategy

"Never waste a good crisis" is a phrase you often hear in times of turmoil and we're hearing it a lot nowadays. A crisis can be a catalyst for positive change, by forcing innovation and focus and speeding up important projects that had previously become bogged down. A crisis can unify purpose, whether it's a country, a company or a team. New and useful technologies often emerge out of crises.

In the investment world, too, a crisis can be an opportunity to review portfolios, identify underpriced assets and make important changes.

However, like any good catchphrase, there's a flipside. Going into "crisis mode" comes with its own problems. First, there's the matter of action bias – the compulsion to make decisions or act when the best approach is sometimes to sit tight. There's also a tendency to put important activities on the back burner during a crisis, often to the detriment of a long-term strategy.

Often, though, we misread the longer-term impact of a particular crisis and end up making decisions that have harmful long-term effects. This is particularly true in financial markets.

That didn't age well

Looking back over the past 30 years or so, many of the trades that seemed obvious in the heat of a crisis have turned out to be poor decisions. We look at four major crises over that period where the "obvious" trade turned out to be the wrong one: the Russian debt crisis of 1998, the rand crisis of December 2001, the Global Financial Crisis of 2007 and 2008, and the Covid-19 pandemic of 2020.

Russian debt crisis – sell Russian equities

The fall of the Berlin Wall in 1989 opened up the countries of the old Soviet bloc, leading to major structural changes as they adopted the economic models of the West. But it wasn't plain sailing. Russia was a particularly painful case. By the late 1990s, Russia had come to rely on oil exports and short-term capital inflows to fund itself. Faced with negative investor sentiment towards emerging markets and a decline in oil prices, the Russian government devalued the ruble and placed a moratorium on foreign debt repayments in August 1998.

The fallout from the decision reverberated around markets. The ruble went into freefall, Russia's banking sector was thrown into crisis, inflation soared and the economy nosedived. Outside Russia, European creditor banks were hard hit and US hedge fund Long-Term Capital Management collapsed, requiring a bailout of US banks exposed to it. Investors sold off emerging-market currencies, bonds and equities, with South Africa among the markets in the firing line.

The Russian index hit 260 in April 2000, 467 in September 2003 and 1923 in May 2008, an increase in nine-and-a-half years of 4,290%. 

There seemed little reason at the time to be positive about Russia, yet the recovery in the following years was remarkable. From a low of 43.8 in September 1998, the benchmark Russian equity market index rebounded strongly, as the devaluation lifted exporters, while rises in oil and gas prices over the following years helped to sustain the economy and market. The Russian index hit 260 in April 2000, 467 in September 2003 and 1923 in May 2008, an increase in nine-and-a-half years of 4,290%. 

Rand crisis – sell the rand and SA Inc

The last few months of 2001 are etched into the memories of many South Africans. From 1 September to the end of the year, the rand shed 42% of its value against the US dollar, accelerating into the December festive period and ruining the summer holidays of many a forex trader. The rand weakened from about R7.77 to the dollar to R11.64 over that period and hit R13.84 at one point.

More pain was to come, as the SA Reserve Bank hiked rates by four percentage points between January and June 2002, and only started cutting rates again in mid-2003. South Africa's banking sector also faced a crisis among its smaller banks in 2002, starting with the collapse of Saambou Bank in February, which sparked panic among customers of smaller banks. By late 2003, most of South Africa's smaller banks had either been taken over by larger banks (eg Nedbank took over BOE) or deregistered. The weaker rand and higher interest rates had all contributed to the loss of confidence.

This sounds like an environment for moving as much money offshore as possible and ditching SA Inc shares (shares whose performance is closely linked to that of the South African economy). But this would prove to be a terrible mistake in the coming years. The rand was not only the best-performing currency against the US dollar in 2002, but it continued to gain ground against the dollar in the following years. One reason was the unleashing of the Chinese juggernaut – China needed iron ore, coal, copper, manganese, platinum and other industrial metals to feed its manufacturing and construction boom, and South Africa had plenty to provide. The commodity boom boosted inflows, underpinned the rand and helped lift the fortunes of the South African consumer, all of which were good for SA Inc shares.

The Global Financial Crisis – sell US banks

Much has been written about the Global Financial Crisis of 2008 and the subprime crisis that preceded it so we won't go into too much detail here. Given the exposure of the US financial sector to the underlying credit problems that had precipitated the crisis in the first place, you would have thought that US banks would have battled to rebuild their balance sheets and earnings in the subsequent years. You also might have thought that European banks would outperform in the subsequent years.

That's not how it turned out. After hitting a 15-year low in early March 2009, US banks recovered over the following years and surpassed their previous high (of May 2007) in late 2017. In retrospect, those gains make sense given the Federal Reserve's interventions (buying bonds and other assets in the market and keeping rates very low).

But European banks, which were also able to count on the interventions of the European Central Bank, did less well. German banks, for example, trended lower over the following 10 years. It turns out that the US's crisis had exposed flaws in the European financial system as well, setting off the sovereign debt crisis of the 2010s.

Covid-19 – buy vaccine producers

The 2020 pandemic was perhaps the strangest global crisis among those covered here. Exactly six years ago, we were confined to our homes, not knowing what the future held. After several waves of infections, there was good news at the end of the year, when the US, UK and EU approved the mRNA vaccines of Pfizer-BioNTech and Moderna.

The companies' share prices responded positively. From about $80 in December 2020, BioNTech's shares rose to $389 in August 2021. The good vibes didn't last, however. The shares had fallen to $135 by March the following year and haven't done much since – they were trading at under $100 on 15 April this year.

Moderna – at $67 at the end of October 2020 – soared to a high of $449 in September 2021, but then fell sharply. It was trading at $54 earlier this month. The vaccine companies were victims of their own success, as immunity to the more virulent strains of the virus reduced the demand for the vaccines.