Investments

Keeping a level head – coronavirus and stock markets

5th March 2020

The Author: David Cooper

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Financial strategist, investment adviser and Sales Director for United Advisers

Stock markets have reacted sharply to the spread of coronavirus to countries outside of mainland China. Given the current crisis looks set to continue for the foreseeable future, investors should brace for more volatility in the stock markets. However, we urge you to remain calm and not to allow fear to govern your investment decisions.

No one can predict exactly how much damage there will be to the global economy from the current coronavirus crisis. However, we have witnessed similar large-scale health scares in the past such as SARS, Ebola and Zika, events which provide a large amount of data for economists to analyse.

The World Health Organization is coordinating a global response to the coronavirus, helping affected countries to take aggressive measures to contain it from spreading further. But when it comes to impacts on global markets, a health crisis like coronavirus can take months, even years, to play itself out.

With this in mind, it is better to ride out near-term volatility and wait for markets to recover in the medium term. So, while growth is being ‘deferred’ rather than destroyed, weakness in share markets will likely be a temporary phenomenon. Keep in mind that valuations around the world are higher than when previous pandemics were triggered, and we are at a later stage of a more mature economic cycle.

Without ignoring the very real fears people have in regard to the current crisis, we encourage you not to panic when it comes to your investment decisions. We know many people are inclined to race to sell shares when markets are volatile; however, we also know that it’s wise to not sell while those shares hold less value.

In fact, it was Warren Buffet who famously advised investors to “be fearful when others are greedy and be greedy when others are fearful”. He demonstrated that just last week when he boosted his stake in Delta airlines during its massive market selloff that was fuelled by fears surrounding by the coronavirus.

In summary, when making decisions about your investments, always think long-term as markets have a history of bouncing back.

Tim Buckley, CEO of Vanguard in his recent public message regarding the coronavirus said:

“Stay the course. An investment plan established during calmer times should not be abandoned in the midst of a market downturn.”

Oil impact – update

The decision by Saudi Arabia to cut oil prices and threaten to expand production adds another deflationary force in the global economy. Brent oil prices have fallen close to $14 to $31 in early trading in Asia. This marks the most significant fall in oil prices since 1991.  Lower oil prices will transfer spending power to oil consumers such as Japan and India from the Middle East. However, they will also further deflate the global economy as headline inflation falls away, and oil production economies see a sharp drop in GDP.

The sudden downward lurch in the oil price will bring back memories of the spread widening seen the last time the oil price turned from highs above $100 per barrel and dropped from there. The US HY Index carries a significant proportion of energy bonds, hence the spike in spreads seen there.

 

 

 

Note: some of the information provided here is based on a recent update by UK wealth managers Brewin Dolphin who manage some funds for United Advisor Group clients.

The updated inforamtion regarding the oil prices was produced by Purple Strategic Capital Ltd (“PSC”). The information contained in this report is for informational purposes only and should not be construed as a solicitation or offer, or recommendation to acquire or dispose of any investment.