CORONAVIRUS: MARKET UPDATE

Investment & Wealth Advice




"THE MARKET IS MOVING BUT MOST INVESTORS SHOULD SIT STILL"

John Butters - Chief Investment Officer
 

  • We continue to advise clients not to react to current market conditions.
  • Stock markets fell sharply on Monday and are rebounding somewhat today (Tuesday 10 March).
  • The cause was a fall in oil prices together with ongoing fears about the coronavirus.
  • COVID-19 continues to spread. The whole of Italy has been placed under quarantine and other countries may impose similar measures in order to delay the disease peak and buy time for vaccine development.
  • The economic shock is the result of deliberate government action to contain the virus. When controls are loosened, an economic rebound is likely.
  • Interest rate cuts and government spending are likely in the short term to cushion the impact. In the longer term, central banks may need to experiment with new tools.
  • Markets are impossible to time and tend to bottom out when fears about the future are strongest – not when the economy is at its worst.
  • Please do get in touch should you wish to discuss anything with us.

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?

Stock markets fell sharply yesterday owing to steep decline in oil prices (and therefore oil company shares) and the continued spread of the coronavirus. Shares are still up on a global basis since the start of 2019.
 
Bond yields have fallen around the world. The interest rate on two-year government borrowing fell briefly below zero yesterday in the UK. US government bond yields have fallen sharply and German bonds fell deeper into negative territory. This tells us that interest rate cuts and further central bank action (potentially including forms of quantitative easing) are being priced in to the markets.

Oil prices

A disagreement between Russia and Saudi Arabia at a meeting last week has led to a steep fall in oil prices. The talks were intended to create an agreement on reducing oil supply to counter the effect of demand lost in the coronavirus shock – that is, to keep prices up. Russia has been coordinating oil production with OPEC since 2016. It appears that the disagreement is over long-term strategy. Russia believes that now is the time to strike US shale producers by allowing prices to stay low, thereby driving shale producers out of business and improving the competitive position of Russian oil. Saudi Arabia does not agree, and appears to be trying to force Russia back to the negotiating table by opening the taps and driving oil prices further down.

In the medium to long term, lower oil prices will be good for the global economy. In the short term, markets have taken a hit as oil company shares have sold off. Some credit markets have also been hit. The US high-yield bond market in particular is heavily exposed to shale oil companies and bankruptcies are possible.

COVID-19

The coronavirus situation is changing quickly. Italy has extended its quarantine to the whole country. Schools and universities will be closed and public gatherings are banned until 3 April. People are permitted to travel to work, shop for food and leave their houses for medical treatment, but will have to sign a self-declared document to show to police to explain their movements. Travel for illegitimate reasons is punishable by fines or up to three months in prison.
 
The world is making a judgement that it is worth incurring significant short-term economic damage in order to permanently contain a disease that is as bad as the flu, which of course can be deadly. Looking at the spread of the virus (see links to maps, below), it appears unlikely that it will be eliminated from the world solely by quarantine. But there is still a reasonable argument for strong measures: as the UK government’s paper of last week explains, slowing the spread of the disease and lowering its peak will push more cases into the summer months when hospitals are less busy and buy more time for research into a vaccine, which might provide a permanent solution.

The UK government also says that the costs of combating the virus will need to be weighed against the economic damage. One danger is that governments could become politically committed to quarantine and find it hard to row back even if economic damage becomes severe. That danger notwithstanding, this latest shock is very different from the financial crisis of 2008: it is being created intentionally by the authorities to fight a disease. Eventually restrictions will be relaxed, and the most likely scenario is that the global economy will rebound. What we do not know is when the rebound will come. All we can do at this point is observe that the Chinese outbreak seems to have been stopped from spreading within two months.

Potential government action

Governments are already considering measures to support the economy. The UK budget on 11 March is expected to include action to fight the economic fallout of the virus, with media speculation including extra money for healthcare and a hardship fund to help embattled businesses. In the US, Donald Trump has said that a “very dramatic” package is in preparation, including a payroll tax cut.
 
With regard to central banks, in addition to cuts in interest rates we may see further action from central banks if the economic shock continues. One problem may be that the shock is deflationary: inflation rates around the world could fall below the 2% target of the major central banks. This could lead to a longer-lasting economic problem as inflation remains stubbornly low, as has happened in Japan; or it could lead the authorities to experiment with new tools, up to and including creating money for governments to spend, a step on from quantitative easing (QE). QE is not quite the same as creating spending money for governments, even though the media tend to conflate the two. We know that creating money tends to lead to inflation, whereas QE does not do so reliably, but up to now politicians and central banks have considered it too much of a risk. Persistent low inflation could eventually change the calculus.

"We continue to advise clients to remain invested"

Although markets fell sharply yesterday, we continue to advise clients to remain invested. A small imbalance between supply and demand can lead to a big price move, as in the oil price spike of 2008. Nobody was going to fire a fund manager for not buying the market yesterday, which makes it no surprise if sell orders exceeded buy orders. Markets can turn around quickly in volatile times.
 
It is important to keep in mind that markets are always looking forwards. They continually try to price what is going to happen in the future. This means that they tend to bottom out when fears about the future are strongest. The UK market famously bottomed in the Second World War at the time of the Dunkirk evacuation in 1940 – after that, the situation was terrible but improving. This makes it very difficult to time the market. What we do know is that sudden crashes often look, with hindsight, like blips on the chart, and even the global financial crisis now seems like a temporary wobble in the two-centuries-long upward pull of the stock market. Historically speaking, the biggest danger to your money has not been these temporary falls, but selling out.

Resources

Maps and other trackers
 
Worldometer has various trackers.
Johns Hopkins has a case tracking dashboard.
Nextstrain shows the progression of viral strains and how it has spread.
 
Information sources
 
World Health Organisation
UK NHS
UK government case information
European Centre for Disease Prevention and Control
Centers for Disease Control and Prevention

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.

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