Investment Update – March 2020

After the recent market volatility surrounding Coronavirus fears, you will have woken this morning to headlines of FTSE 100 falling on opening by 8.50%. This in turn has lead to increased speculation that we are heading into a global recession.

We thought it may be helpful to provide some context to the current situation:

Coronavirus

Action to contain Coronavirus, involving travel restrictions and quarantine areas, is economically damaging. Recent falls in the stock market reflect this.

Whilst full details of the disease and its severity are unknown, it appears most dangerous to the elderly and infirm (typically with underlying conditions). Young children do not appear to be particularly susceptible and reported infections among the young appear surprisingly low. We have no wish to dismiss the human tragedy involved, but the groups most at threat are largely economically inactive. Health care services will come under pressure and care costs will be high, however, this burden will largely fall on the public sector. Taxes could consequently rise or, more likely, public borrowing will increase.

Global central banks have cut interest rates to support the economy. This should help offset the damage wrought to supply chains and demand. Economists’ estimates of the costs of the virus range anywhere between 0.5% and 10% of GDP depending upon its severity, with the central projections appearing to be falling around 2%. The economic costs of closing schools are significant, as parents become obliged to stop work to care for their children. If the young are largely unaffected and presumably not part of the virus’ transmission route, schools may not have to close. This will help to reduce the economic implications.

The impact on the stock market may be short term in nature and a ‘V’ shaped recovery in markets is not out of the question. Indeed, this seems to be the path that the Chinese stock market is taking. However, if countermeasures against the virus, such as wide scale quarantine measures (Italy) and stringent travel restrictions are in place for an extended period, the impact on commerce is likely to be more pronounced. Then, expectations of a ‘U’ or ‘L’ shaped recovery in markets may be more appropriate. At this juncture it is too early to tell.

Oil

Saudi Arabia slashed its oil prices at the weekend after it failed to convince Russia on Friday to back sharp production cuts in recognition of falling demand caused by the coronavirus threat. The two sides failed to agree on measures to cut production by as much as 1.5 million barrels a day.

Brent oil futures plunged from $45 to a low of $31 a barrel this morning (- 31%) in extremely volatile energy markets.

It could be considered that a lower oil price is good for manufacturing and therefore the wider economy. In isolation, this would perhaps signal a ‘buying opportunity’. Whether the impact will work into wholesale oil prices at the petrol pumps and industry is another question.

Combining the two market difficulties means that the only appropriate prediction is that we are likely to see more and possibly significant volatility over the next few weeks and months.

Financial Planning Implications

It is times like these that remind us of the importance of investing with the longer term in mind. After several years of positive ‘bull’ markets, we can be tricked into forgetting the warning that ‘values can fall, as well as rise’.

Your portfolio is deliberately diversified, considering your risk profile and liquidity requirements. This aims to dampen the impact of market falls, whilst seeking returns during the good times.

You will also recall that we test the feasibility of meeting your lifestyle planning by showing the impact of a market fall, typically at 20% with no recovery. This is always intended to provide reassurance that you can put aside the short-term market noise and take a longer-term view, bearing in mind that we would expect a recovery over a period of time.

We will continue to monitor the position, although please let me know if you would like to discuss your portfolio or situation further.