This blog post is a reaction to the recent disruptions in global investment markets driven largely by the worldwide spread of the coronavirus, COVID-19. We would like to share a brief summary and give you some of our current views on the evolving situation.
A combination of the disruption to the global economy of the actions being taken to slow the spread of COVID-19 and a rapid fall in the oil price has created increased volatility in equity markets. Initially this manifested itself as a correction (when markets are down 10% or more) and following recent news (Italy shutdown, US stopping flights from Europe, sporting and mass events closures) market participants have reacted again driving indices to levels that mean that we are now in bear market territory (when markets are down 20% or more). Equity markets are supposed to be a forward forecasting mechanism and therefore nothing worries them more than an inability to arrive at a model for what is likely to happen. The falls have been characterised (as usual) by brief bounce backs which are created by people who are hoping to react faster than the crowd, but we feel that the news flow is still too negative for a sustainable market recovery.
Our view is that until we have sufficient data points upon which we can model the likely virus peak in different countries, then volatility will continue. The near capitulation seen on Thursday has led us to feel that following massive pledges of support from Central Banks and Governments, markets have found a floor at least in the very short term.
The depth and length of any economic slowdown will depend heavily on Central Banks and Governments, and market reaction today to the Fed, ECB, Bank of Japan and Bank of England suggests that there is a positive outlook, at least in the short term. Whether this ends up being the bottom of this market rout is too soon to tell, but long experience leads us to expect that we will continue to see wide swings in markets as investors react to business and humanitarian news flow, which will remain continuous and often sensationalist, thereby keeping a lid on risk appetite. We may still see markets trend downwards, albeit with days of capitulation and days of bounce-backs, but on a medium to longer term view, these levels may provide a reasonable entry point for some risk allocation, with the caveat that returns will remain extremely volatile.
It seems increasingly likely that the global economy will go into recession and governments and central banks are already reacting to try to reduce the economic effect. We do not yet know how long a recession might last and it may be just the event that (from a purely investing perspective) markets need to remove the heady valuations that had been apparent in recent months.
From a wider human perspective, this is a very difficult time and we are very aware of the potential for this virus to be life threatening to those whose health is compromised. We must all try to strike a balance between sensible practice and avoid widespread panic, and all of us at FPWM are taking the hygiene practices to heart. We are positioned to work remotely if required and are committed to doing all that we can to protect or client’s wealth over the long term.
Clearly the depth, breadth and timing of the viral contagion and policy responses makes estimating the economic impact especially tricky and news about the coronavirus spread and policy reactions are evolving on a daily basis. With this is mind, we are keen to reassure you that we at FPWM are carefully monitoring developments to do all that we can to safeguard your wealth.
Our portfolio asset allocation strategy was built with times such as these in mind and as a result we expect that a combination of the asset allocation and fund selection processes will provide protection against the worst of market falls and all the indications to date are that this is the case. We will remain vigilant, as this is not the time to become complacent or take your eye off the ball.
In the meantime, if you would like to discuss either the wider issues or your own particular situation, please do not hesitate to contact us.