Market Update


John Butters - Chief Investment Officer

  • Markets have suffered a sharp fall but there should not be a sense of panic for investors
  • Our analysis of historical fluctuations shows this decline is unusual, but not outside expectations
  • As our clients are long-term investors, our advice is not to react
  • We have stress-tested all our clients’ financial plans for scenarios worse than this
  • Please do get in touch if you have any concerns and would like to discuss your portfolio or investments

Press Coverage:

"Fear is not good at keeping investments safe": Investors warned not to panic, despite coronavirus wreaking stock market havoc - This Is Money
Read the full article

What is happening in markets?

Markets have suffered a sharp fall because of the coronavirus in the past few days. However, they had already gone up in January and February and are now down only modestly for the year to date.
In our historical testing we look at market declines on a month-to-month basis in order to filter out short-term noise (we are sceptical about how much it matters if you “make” money one week and “lose” it the next – that is just normal fluctuation). On that basis, February’s decline is unusual but by no means outside of expectations.
Most portfolios combine stock market exposure with bonds and other assets, which will have moderated their falls. We are seeing performance generally within a range of +2% to -2% for the year to date.

At the time of writing markets are down modestly for the year to date.

Why is it happening?

Markets had rallied in February in the expectation that the coronavirus would be contained. That was not our expectation: on the basis of scientific reports we have thought since early February that a pandemic was likely. Markets have caught up with this reality.
In my quarterly report I said that past pandemics had not had a serious market impact. That could still be true this year: we may look back on this market fall as a short-lived panic, but that very much depends on what happens next.
The main reason for the latest market move seems to be the risk of supply chain disruption. In a world of just-in-time inventories (in which factories only hold enough components for a few days’ production), major quarantines around the world have the potential to cause serious disruption. Apple was the first major company to issue a warning on profits, and more will likely follow. Things could get worse before they get better.
However, we should note the following:

  1. Draconian quarantines are less likely in democracies and also elsewhere in the developing world, where they would be hard to impose. The EU has already said that free movement will continue.
  2. Markets tend to overreact, especially in response to fast-moving events. But long-term investment returns will continue to depend on the actual, long-term performance of the companies you own.
  3. Markets often fail to factor in second-order effects. In particular:
    1. The Chinese quarantine is a political choice: to impose economic damage in order to contain a flu-like virus. If economic damage is severe then this choice may change.
    2. Western policy-makers have yet to react. Central banks could cut rates or return to quantitative easing (QE). Governments could spend more, especially with the USA under Donald Trump and the UK under Boris Johnson. Even in Europe there have recently been signs of more flexibility in this area.
  4. With any improvement in the situation, global economic growth could snap back as pent-up demand meets unblocked supply. This is what happened after the SARS crisis.

Should we do anything?

Markets have had a serious downward move and such moves can be self-reinforcing in the short term as people begin to panic. Markets fell by much more than they have so far in the crash of 1987. Such events are always possible.
However, nobody can consistently predict the markets. Things could get worse, or the rebound could start today. If markets have fallen by some amount – say X% – then they can rebound by at least the same amount. Even the value lost in the great crash of October 1987 had been made back by early 1989. If you miss a rebound, you will be X% worse off forever. There is no getting back lost investment returns.
You do not have to react. Some hedge-fund managers will have been up all night trading in the markets. But our clients are not traders: they are long-term investors. You have one advantage over the professionals, but it is a huge advantage: you can wait these things out. We have already stress-tested our clients’ financial plans for a much worse fall than has happened so far.

We are here to discuss these issues

We are here to help. There are no silly fears and no unreasonable questions at a time like this, with scare stories all over the media. If our investment clients have any concern at all then they should feel free to call their private banker for a discussion or to contact me directly.


February 2020
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Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.