We have been used to rising markets and low volatility for so long that it can be a shock when equity indices take a nose-dive. After several weeks of apparent complacency, when markets continued to rise, some investors have, understandably, started to express their concerns about the spread of COVID-19 and its impact on the global economy with the FTSE All-Share falling over 10 percent in under a week.
China is a much more significant player in the global economy than when the SARS outbreak occurred almost twenty years ago and with significant parts of it in shutdown as the authorities attempted to contain the infection there is clearly going to be a knock-on effect to global manufacturing and trade. Moreover, as the virus spreads, there is risk to the whole of the world economy not just areas exposed to China. However, with the lag in reporting of data there is no concrete evidence of an economic slowdown as yet, although companies such as Apple have warned that their next quarter’s trading periods will be impacted because of broken supply chains and closed factories.
Market sentiment is being driven by reports of new outbreaks with Italy and Iran being the first two countries outside Asia to experience significant numbers of those testing positive. Interestingly with the number of new cases now growing faster outside China than within it, the Chinese stock market has now done better than both the US and the rest of the world year to date.
With so much uncertainty as to the nature of the disease itself and the extent of the damage to the global economy it is almost a given that markets will remain very jittery and further significant falls in market values are highly likely. Whilst this can be very uncomfortable for our clients it is important not to panic. If you feel that your risk appetite and ability to withstand a market correction has changed then please do consider moving into a lower risk portfolio, accepting the prospect of lower, long-term returns for a smoother ride. Otherwise, it has been proven time and time again how difficult it is to time the exit and, crucially, then re-enter into equity markets.
The market volatility has thus far been driven not by fears of slowing consumer demand as in previous downturns but because of disruption in the supply chain. This has the potential to reverse quite quickly if the outbreak is contained or a vaccine is discovered. Furthermore, if Central Banks are forced to intervene by cutting interest rates to support their economies then the demand for equities is likely to resume as the yields on cash and bonds fall further.
No-one knows when markets will stabilise but our recommendation is to focus on your strategic long-term asset allocation, to ensure that this is consistent with your tolerance to risk and capacity for loss, and that your portfolios are well diversified. We undertake this very exercise at least annually with all of our clients to ensure that market events, such as this, whilst worrying, are not a surprise.
We are here to help if there is anything at all that you’d like to discuss.
Shauna Bevan, 28th February 2020
(Source: FE Analytics, Bid-Bid, Total Return 19/02/20-28/02/20)