In our market update at the start of this year, we warned that 2020 could see plenty of volatility in the stock markets. We also listed the possible triggers for such volatility including a weakening of the US economy, an escalation of the US China trade war and profit disappointments from global companies. The coronavirus was most certainly not on the list. But this is typical of sharp market downturns with the catalyst coming from left field and not from what might be described as mainstream source of concern.
At this point, all major markets have fallen by 10% or more from their highs with share prices of companies seen to be directly in the firing line, such as travel companies, airlines and hotel groups, falling by a lot more than that. Commodity prices, including oil, are also down sharply as the Chinese economy, the worlds leading purchaser of commodities, continues to operate at below 50% of capacity and the demand for oil from freight companies, shipping companies and other heavy users drops off a cliff.
All of that said, Asian and European markets have bounced by around 1% from their lows at this point but we feel it would be foolhardy to say the worst is over. The disease is now a global event and it would appear that we are still at the early stages of the infection. So, from the viewpoint of the financial markets, things are likely to get worse before they get better.
What Should Investors Do Now?
While we are of the view that markets will continue to fall in the immediate term, history has taught us time and again that panic selling of equities is the worst option to choose at a time like this. The majority of investors who sold during the crash of 2008 missed the upturn when it came in early 2009 and ended up seriously out of pocket as a result. We continue to believe that equity markets will deliver long term value to investors but patience is required. When it comes to equity markets, short termism is your enemy and time is your friend.
It is also instructive to examine the behaviour of financial markets during previous disease outbreaks over recent decades. The chart below is a clear illustration of market behaviour at times like this. While the markets did fall sharply in many cases, the fall was shortlived and the recovery when it came was relatively swift. Within six months, markets were back in positive territory in almost all cases.
While it is useful to look at history at times like this, it is important to be aware that there are a number of factors which may make this outbreak different.
- It is more highly infectious compared to other virus outbreaks in recent decades as evidenced by its rapid spread globally.
- The prevalence of non-mainstream online media means that the spread of misinformation about the virus can outstrip the facts.
- On the other hand, Medicine has advanced significantly so that a vaccine is likely to be widely available well before the end of the year, much faster than would have been the case previously.
- In addition, awareness levels are much higher and effective arrangements to prevent its spread can be put in place relatively quickly.
Our advice to investors is to sit tight unless you foresee a need for cash over the coming months. It should also be borne in mind that the ongoing correction will almost certainly give rise to very attractive buying opportunities over the course of the year – but perhaps we are not quite there yet.
Terry Devitt – Investment Director Harvest Financial Services
This marketing material has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and;or capacity for loss of any particular person. It should not be relied upon to make investment decisions.