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The novel coronavirus, or COVID-19, continues to dominate news outlets and investment markets at the current time. The virus started and quickly escalated in China before spreading to further countries, such as South Korea, Japan, Iran and Italy, which now has the largest number of cases, outside of China. Stock markets have experienced recent heavy losses and tragically, the death toll is now in the thousands and this number will no doubt continue to rise. Now officially classed as a pandemic, this has made governments the world over highly nervous, as the long incubation period means that spreading can occur rapidly. Containment strategies have been used extensively in most affected areas and these are evolving over time. While success appears to have been achieved in China and some other Asian countries, given the fairly slow response in western countries the ultimate ability to contain the virus to relatively small portions of each affected population is doubtful.
Since mid-January when the issue really started building around the coronavirus, concerns were initially focused on China, and there was at the outset complacency amongst global markets that this would remain a China-specific issue. Therefore Chinese markets experienced the largest falls in late January and while western markets were affected slightly, these largely recovered in early February, with investors believing that the issue would be contained. Over more recent weeks however, the rules of engagement have changed significantly, with European and US markets down by historic amounts over the last couple of weeks.
Individuals are being put into quarantine while in some parts of Europe and the US, towns are effectively being shut down and so business activity in the affected areas is falling heavily as a result. These measures are clearly needed from a healthcare point of view, but the side effect is a falling economic output. With the initial epicentre in China, the world’s second largest economy is now likely to experience a sharp contraction in its economy. This would have been a major setback for global growth in itself, but with the virus now established on a global basis, negative pressures on global GDP are coming from many directions.
While the UK appears to be taking a relatively light touch to containment, other countries are seeing many business operations being shut down in order to try and curtail the spread of the virus. We are also seeing major sporting events cancelled and in the case of the US we have seen a widespread ban on flights from Europe. This is having knock effects for supply chains the world over and therefore this has the potential to lead the world to the point of economic contraction and maybe even recession. It is the fear of this that has led to the investment market losses of recent days.
The big question is how far and to what extent the virus will spread and clearly no one yet knows the full answer, although it appears very likely that the number of cases will rise significantly before the peak of the pandemic is experienced. The focus of the UK government’s efforts appear to be delaying the worst of the healthcare effects until the summer, when the NHS is expected to be under less pressure from the typical winter surge of demand, and also there is the hope that as we move from the cold winter months into the warmer temperatures of spring and summer then the spread of the virus may slow dramatically, as we often see with the common winter flu, however this is just a theory presently and only time will tell.
From the perspective of the financial markets, recent days have seen a dramatic escalation in levels of fear. While the growing number of cases in the US and Europe was the major cause for this, a major weakening of the OPEC+Russia oil alliance on 8th March was a further catalyst for concern. Saudi Arabia, a leading producer, had wanted to limit oil supply in order to support a moderate price for oil, amid concern over slowing demand on the back of coronavirus. Russia was unwilling to agree to this action, instead seeing an opportunity to damage the US, which as a relatively high cost oil producer, particularly suffers from low oil prices. Saudi Arabia seemingly took exception to Russia’s reluctance and therefore changed tactics by increasing supply to the point where the subsequent price falls are so large that they not only hurts the US, but also Russia. This is bad news for the US oil industry, and the wider economy as well. Many of the oil companies in question are financed by a large amount of corporate debt. The fear is that the low oil prices will cause many of these companies to struggle financially, potentially leading to large scale corporate defaults in US oil, which in turn, could spark further concerns and credit issues in the wider economy. The fear of this path to falling oil has therefore added to the sense of pessimism that was already in global markets resulting from continued escalations of coronavirus, further contributing to the large falls in global stock markets that we have seen over recent weeks.
As we have already seen, in parts, governments and central banks are likely to be highly proactive in trying to offset the damage caused by the lost activity so far. China put on extra flights and refunded the cost of travel to get people back into work, while Hong Kong announced widespread cash handouts to permanent residents in order to try and stimulate demand. In western markets, we are unlikely to see such direct policy action, but we are seeing a combination of more traditional monetary and fiscal policy responses. Interest rates have been cut to near zero levels in the US and UK, while quantitative easing programmes have been expanded in Europe and restarted in the US. Policy tools enabling banks to lend to business have also been expanded in many countries. These monetary policy tools have of course been welcomed by markets, but these measures have so far not been sufficient to stem the losses. Fiscal policy is also demanded by markets and we have seen this to a degree, last week’s UK budget promises to ramp up spending being a prime example, but there is the feeling that more will be needed from the governments of leading nations in order to restore confidence on a global basis.
At the current time, while fear has certainly gripped global markets we believe this is a situation that will largely be resolved as we move through the year, and believe that over the medium term we can expect a reasonable recovery in terms of economic activity and stock market levels. Aside from the coronavirus and its recent impact on the investment markets, our philosophy is that no one can predict the peaks and troughs of financial markets with any accuracy and it is extraordinarily difficult to time when the best (peaks) and worst (troughs) are. Timing the stock market is extremely difficult, so often the best policy is to stay fully invested over the medium to long term. Volatility is a normal part of long-term investing which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets. Taking a multi-asset approach means that some assets can fair better in different market conditions as they are more defensive assets such as bonds, whereas during periods of growth equities tend to fair better.
Armstrong Watson, in addition to our full range of accountancy services, also have access to fund management expertise from the Future Money asset management team, as well as independent expertise from the wider market. We are able to use this to help provide insight, commentary, advice and support to our financial planning and wealth management clients.
At the current time we think the appropriate course of action is patience. Some clients may even see this as an opportunity, with equities clearly lower priced than they were even a few weeks ago, however, our philosophy is that time in the market not timing the market, is usually the best approach.
If you would like any further information, please get in touch with your Armstrong Watson contact, Relationship Manager or Financial Planning Consultant on 0808 144 5575 or email email@example.comFind out more
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