Market Update February 2020: Coronavirus & the Impact on Global Markets
After a number of weeks where the markets has largely ignored the possible impacts of the Coronavirus, this week has seen a strong sell off as investors begin to digest the disruption that the COVID-19 virus may cause to global economic activity. The declines experienced this week are of course concerning, as it remains extremely difficult to predict the future impact COVID-19 will have on global growth and the global population.
The falls have occurred due to investors repricing corporate earnings prospects based on a short-term worst-case scenario perspective and it is possible we could see further volatility before institutional investors begin to reinvest capital based on seeing value opportunities in the market.
The recent fall we have seen is one of the biggest market drops since 2008/2009, however, a look back at previous epidemics and the impact they have had on global equity market returns suggests that the past epidemics have not resulted in any significant or long-lasting damage to global stock prices. While certain economies and markets have been negatively impacted for short periods, most of these potential worldwide pandemic threats have proven to be just that – potential. This being said, we need to be aware of the potential impact of businesses being partially or fully closed, consumers being unwilling to spend and travel, trade and movement of labour being restricted.
If you consider the 2009 H1N1 Mexican Swine Flu, this affected up to 1.4 billion people (at least one in five people worldwide were infected), and had a death rate of 0.2% resulting in a fatality count in excess of 160,000. In comparison to those flu-type outbreaks, the news coverage and the extent of preventative action from governments have been of a different order. Indeed, it is the preventative action that mostly affects economies and financial markets. Global manufacturing supply chains have been affected by much of China’s extended lay-off since the beginning of the year. That said, the clearest global impact of the COVID-19 outbreak so far has been on travel and events.
The revenues and profits of many companies will be lower in the coming months. This week, Diageo has warned investors that revenues will be lower than expected for this fiscal year, a decrease of about 1-2%. Some highly-leveraged companies are particularly vulnerable with the most obvious ones being in the logistics, travel and airlines industries. Energy and resource companies, which were stressed by slow global growth before the outbreak began, are facing even higher financing costs.
However, while bank share prices have fallen slightly more than the overall markets, they are not yet signalling fears of a systemic credit issue. Indeed, government bond yields have experienced a sharp fall (resulting in increased capital values), accompanied by a growing expectation of interest rate cuts and monetary intervention from central banks. Institutional investors now see a high likelihood that US rates will be cut by 0.25% within two months.
The probability of policy action to offset economic weakness is likely to support markets in the short-term and potentially provide fuel for a sharp bounce in future activity, most likely in the second half of 2020, although if the virus continues to spread this could prolong any recovery.
Despite the widening of the infected area in recent weeks, the rate of infection has slowed overall and the WHO has not changed its view that COVID-19 will follow this path, even if it may yet be classed as a pandemic. Action to prevent its spread will continue, and will be a necessary burden on the global economy. Markets may be both hurt and supported by those actions.
This bout of volatility will take some time to pass, and further stock market falls are certainly possible. However, there is good medium-to-long-term potential for stocks. Developments may well be positive rather than negative and trying to time any risk reduction (and increase) threatens to destroy value for investors rather than protect them.
As a business we appreciate client concerns in relation to expected volatility in the coming months and we are conscious that we need to maintain a close eye on the global economic environment. However, our long-term investment philosophy remains the same and we are also particularly aware of the potential risks of trying to time the markets. Our predominantly active portfolios have been designed to ride out short-medium term market volatility and deliver to a long-term investment mandate.
Our portfolios are not immune to the exaggerated downward movement experienced over the last week, however, our preference for prudent and sensible diversification means that our portfolios are not exposed to the amount of downside risk that the broader equity markets are currently subject to.
As it stands, our medium to long term outlook remains unchanged as does our preference to stay invested and not be swayed by short term market movements. We acknowledge that further volatility is likely in the near term as the spread and economic impact of the Coronavirus unfolds, however we remain committed to our longer-term strategy given the improving economic fundamentals seen in recent times. That being said, we appreciate times like this can be disconcerting, and therefore should you wish to discuss things further please feel free to contact us.
We will continue to monitor the situation closely and will of course keep you informed along the way.
Who are Vizion Wealth?
Our approach to financial planning is simple, our clients are our number one priority and we ensure all our advice, strategies and services are tailored to the specific individual to best meet their longer term financial goals and aspirations. We understand that everyone is unique. We understand that wealth means different things to different people and each client will require a different strategy to build wealth, use and enjoy it during their lifetimes and to protect it for family and loved ones in the future.
All of us at Vizion Wealth are committed to our client’s financial success and would like to have an opportunity to review your individual wealth goals. To find out more, get in touch with us – we very much look forward to hearing from you.
The information contained in this article is intended solely for information purposes only and does not constitute advice. While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.
