Naturally the news is concerning for all right now. At Strategic Solutions we are very mindful of the impact that this has on our client’s emotions and the knock-on effect to all our investment portfolios. What we are talking about in this article is simply the impact on investments, we are not in any position to add to any hype or to belittle anybody’s fears on the medical impact of the current situation, too many ill-informed opinions from the wrong sources are already in circulation. We certainly are in the middle of an infodemic.
Adding to the news overload, for some of our clients is the ‘10% drop’ letter that some discretionary clients may be receiving over the next few days or weeks. This applies to clients who utilise the services of a discretionary investment managers, for example (but not exclusively) Casterbridge Wealth, Investec, Charles Stanley or Quilter. Discretionary Fund Managers are required to send a letter informing clients if their portfolios drop by 10% or more from the previous statement. For those clients we look after on an advisory basis, the regulatory anomaly is that they must not get a letter. Even if their portfolios have had the same downturn as the discretionary portfolios. Considering that the FTSE 100 index drop from the peak in 2020 to the time of writing is over 20%, it means some letters will be getting sent out to some clients.
Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.”
The highs and lows of markets are perhaps the only thing we can safely say are a given. Invest for long enough and you will experience markets soaring at their peaks one minute then crashing down before anyone can sound the warning bell. In the last 45 years the UK Stock market has fallen by 20% or more 9 times. Each time going on to record new highs and considerably higher valuations in following years. Yet, every time it happens it feels brand new and hurts.
2019 saw considerable gains across markets but the start of 2020 has proved more challenging. In the last month, we have seen a very violent risk aversion caused by the spread of the Coronavirus outside Chinese borders multiplied by the oil price war between Saudi & Russia. This forced investors to strongly revalue global growth expectation downward and flee equity, credit and risk-on currency markets in a rush to excessively expensive safe havens.
Battling the virus will entail the closures of factories, reduced activity for travel, tourism, events and discretionary spending, as well as supply chains interruption. Individual countries could confirm a recession, and China will reveal a big shock to its output. This means lower corporate earnings and the need for central authorities to keep credit easy to tide businesses over cashflow difficulties. Encouragingly, policy makers have already demonstrated a willingness to provide a release valve for economies, markets and investors. In this scenario we are likely to have a U-shaped recovery, our most likely expectation.
Our worst-case scenario would involve a prolonged outbreak of the virus globally, with more closures and significant disruption to normal life. This would lead to a world recession and a substantial fall in profits and earnings. Under this scenario, it would be a while before there is any improvement in the economic and financial market environment.
The best-case scenario is a sharp V-shaped recovery, as governments give the all clear, based on an early reduction in infections and markets bounce back as quickly as they dropped. Maybe quicker.
Behind the virus headlines, oil has fallen sharply, with crude prices now having broadly halved since the start of the year. In the long run it is important to remember that low oil price will be highly beneficial to many. In the shorter-term, it is indicative of a market that has very quickly become very fearful.
When we reach maximum negative news the lesson from history is that it is time to buy not sell. We aren’t sure we are at that point yet but with interest rates this low, even if earnings fall sharply, equities will eventually find buyers. As financial planners our role with our clients is to help them achieve their long-term goals by building plans and then making sure they remain on track. Human emotion and ‘behavioural finance’ issues are sometimes the biggest dangers to remaining on track, the noise is hard to ignore – especially in modern times when it can be constant and almost deafening and coming at us from all angles. To counter the modern talk, please think of us as your very own Odysseus tied to the mast of your ship trying to ignore the noise of the Sirens who are desperately trying to lure us all into the troubled waters nearby.
If you have any concerns, please contact your adviser who will be happy to explain more and if necessary, make any adjustments.