Coronavirus (Covid-19) and co-incident falling oil prices

As a company we believe it important to comment on major investment events in order to provide informed opinion and help to quell any potential concerns … Especially given the sensationalist nature of media reporting. The present global market turmoils, which some commentators may describe as ‘freefall’ all stem mainly from the implications of Coronavirus (Covid-19) and co-incident falling oil prices.

To place a perspective we should perhaps firstly say that it is not uncommon for markets to experience 10% falls, indeed it would be unusual for this not to happen from time to time. However, falls of 20% and more are rare and as most investors will measure their wealth in pounds and not percentages or time horizons it is natural for such occasions to generate genuine concern.

Where are we with markets and how bad is it?

Well, whilst it is true to say we are witness to an unprecedented series of events, so we cannot be sure of outcome or timings, but the world has seen many pandemics before (remember HIV, Ebola, SARS , Avian flu and Swine flu) the difference today is that never before have countries isolated their inhabitants in reaction to a new viral disease and so the knock on effect of that remains incalculable. Without the benefit of global control we can expect markets to continue to jerk with every new isolation announcement as the virus spreads from country to country so continued market disruptions appear to be on the cards for a while. However, the good news is that the containment in China appears to be slowing new cases and so we must hope this profile repeats. That said, let us also remember that this pandemic is a virulent flu and is not the black death ! So one could also take the view that as humans we are massively over-reacting and our global stock markets are paying the price as short term trading losses turn into longer term supply chain issues, which lead to future profit warnings and an increased risk of companies defaulting on debts; This in turn is likely to cause the collapse of some companies, with airlines and tour operators presently in the front line. So we think it inevitable that there will be some commercial casualties. That said your portfolios will all be well diversified and markets will eventually recover, for they always do.

Oil prices are an important element of this mix as the national isolations (e.g. Italy and USA) will cause global oil demand fall. It was therefore tragic timing for Russia to announce it’s departure from OPEC membership this week and for Saudia to respond to this by saying it will increase oil supply. An increased supply coupled with reduced demand can only result in much lower oil prices which may be good news for us as consumers in a few months but is very bad news indeed for the entire oil industry now, which comprises c11% of the FTSE 100.

What is the answer ? … Prudent investors will sit out the storm for they know that markets have no memory and such events are all part and parcel of the mechanism of a capitalist society. The most fearful may sell their investments to cash .. however that brings the problem of when one has the confidence to reinvest .. and we all know that selling low and buying high is a perfect recipe for financial disappointment. We would urge all investors to hold a long term view and stay their course. Trying to outguess the timing of market entry and exit is a fools game. Your asset allocations will have been set for a reason and you should trust in the longer term recovery.

By all means feel free to discuss the implications of lower market valuations with your advisers and revisit your positioning relative to your planning objectives .. but trust also that all storms pass. We offer broader guidance below …

Top tips for staying calm in today’s markets

At times like this, it is sometimes worth reminding ourselves that it is this very uncertainty of shorter-term market outcomes that delivers investors with returns above those of placing bank deposits. This allows us to grow our purchasing power over time. In the case of equities, this uncertainty can be high as the market adjusts its view of long-term earnings and the discount rate it uses to establish market prices. If there was no uncertainty, then there would be no equity premium.

In contrast to the recent sensationalist headlines, such as the BBC’s ‘Coronavirus fears wipe £200 billion of UK firm’s value’ the never-published headline of ‘Over the past 10 years global equity markets have turned £100 into £266, so giving a bit back is perhaps to be expected#’ provides some comfort to those already invested. To those who aren’t invested or have money to invest, stocks are cheaper than they were at the start of the year. Good news does not sell as well as bad news!

You may be asking yourself whether this health-driven market event is different to those that have gone before. It is, but only because every market fall is driven by a different combination of events that impact on future corporate earnings. What should remain the same is your response to it: avoid panic, avoid unnecessary emotionally driven investment activity, believe in your portfolio and the power of markets and capitalism to recover in time.

Here are some tips to help keep things in perspective:

10 things to remember during market falls

  1. Embrace the uncertainty of markets – that’s what delivers you strong, long-term returns. Remember that you most likely own bonds in your portfolio too. Your portfolio won’t be down as much as the headlines.

  2. Don’t measure your portfolio’s performance from the top of the market, but over a longer and more sensible timeframe.  Take a look at the charts on the next page. Over the past five years, investors have received handsome growth. Even over the past year, equities are only a little below where they started.

  3. Don’t look at your portfolio too often. Get on with more important things. Once a year is more than enough. If you are looking every day, then have a word with yourself. Stop listening to the news too, if it worries you.

  4. Accept that you cannot time when to be in and out of markets – it is simply not possible. Resign yourself to the fact. Hindsight prophecies – ‘I knew the market was going to crash’ – are not allowed.

  5. If markets have fallen, remember that you still own everything you did before (the same number of shares in the same companies, and the same bonds holdings).

  6. Most crucially, a fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell? Falls in the markets and recoveries to previous highs are likely to sit inside your long-term investment horizon i.e. when you need your money.

  7. The balance between your growth (equity) assets and defensive (high quality bond) assets was established by your adviser to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially. If necessary, your adviser may rebalance your portfolio to make sure that you have the right level of equities to benefit from future market rises.

  8. Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of equity market falls. You can see this in action in the one-year chart below. Be confident that you have many investment eggs held in different baskets.

  9. If you are taking an income from your portfolio, remember that if equities have fallen in value, you will be taking your income from your bonds, not selling equities when they are down.

  10. Your adviser is there – at any time – to talk to you. He or she can act as your behavioural coach to urge you to stay the course. They are a source of fortitude, patience and discipline.  In all likelihood they will advise you to sell bonds and buy equities, just when you feel like doing just the opposite. Be strong and heed their advice.