2nd March 2020
This post outlines our thoughts on the Coronavirus and its impact on financial markets, and by extension your portfolio.
As I am sure you have heard or read about by now, this new virus began in China and has increasingly spread across the world over the last month or so.
Whilst the number of deaths caused by the Coronavirus has so far been relatively low (compared to the seasonal flu for example), health organisations are concerned at how easily the illness can spread. Consequently, there could well be significant economic disruption to supply chains and international trade in trying to contain the virus.
In the face of this possibility, most stock markets suffered significant falls last week as investors seemed to consider the worst case scenario. What is also likely to have played a part in the sell-off is that 2019 turned out to be a very impressive year for global equities, with some investors questioning whether they were already overvalued.
It is important to remember at these moments that stock markets have always suffered sporadic sharp falls, and will continue to do so in the future. The crucial point is that these sell-offs, though frustrating at the time, prove temporary.
We have no reason to believe that any disruption to the world economy will be anything other than temporary, and that stock markets will continue to offer solid returns over time.
Therefore, we believe that your portfolio is well positioned and do not believe that any change is necessary in the face of the Coronavirus outbreak. However, as always, we will continue to analyse the situation and contact you if our advice changes.
UPDATE – 13th March 2020
In the last few weeks stock markets around the world have fallen sharply and exhibited significant volatility as it has become inevitable that there will be large-scale disruption to the world economy.
At the time of writing most stock markets have lost well over 20% of their value, which makes it the largest sell-off since the financial crisis. Meanwhile US Treasury yields have reached all-time lows.
In China, where the virus originated, severe containment measures have seen the number of new daily cases fall significantly and businesses are beginning to re-open. However, in much of the Western world the outbreak is still spreading at quite a rapid rate.
This is causing investors to question whether the damage to the world economy will be relatively short-lived, followed by a rebound, or whether there will be a protracted and damaging slowdown.
We do not try and time the market by making short term calls as we believe that no one can consistently get those calls right. Instead we make decisions based on which asset classes and regions look more attractive over the medium to long term.
Prior to the Coronavirus outbreak unemployment across most of the world was low, inflation was low, the world economy was growing at a steady pace, and there was no evidence of dangerous levels of debt.
Therefore, given where we are now, we do not currently believe that it is the time to reduce equity exposure in favour of bonds or cash. We do not think that company earnings will be permanently damaged by this outbreak. Whilst some companies most exposed to the crisis, such as travel companies, may experience financial difficulty unless governments offer support, the large majority of companies should recover in time.
We believe the best course of action is to remain invested in good companies, diversified across regions of the world. For defensive, cautious and balanced portfolios we have maintained exposure to assets which tend to do better during times of stress such as government bonds and gold.