UPDATE – 23rd March 2020
This post outlines a further update on the effects of the Coronavirus outbreak.
The major Central Banks have now made emergency rate cuts or introduced new stimulus measures, with the Bank of England cutting interest rates to the lowest level on record.
However, conventional Central Bank policy is having little positive impact on stock markets at the moment because the main issue is not that consumers and businesses need to be incentivised to spend, it is that they physically cannot spend whilst so much of society is closed.
More important are the actions of governments in preventing a huge spike in unemployment and in allowing businesses to survive this period so that they can re-open at some future date.
There is a sense that governments are now beginning to get to grips with the scale of what will be needed, although at the time of writing the US government has still not finalised its stimulus package.
The challenge for financial markets is that this kind of recession has never been witnessed in modern times. The world economy is effectively in hibernation for an unknown period of time, and we are unlikely to see a consistent recovery in stock markets until there is more certainty over how long this situation will last.
What we can say is that some fund managers who had built up levels of cash over recent years have been investing a portion of this cash as stock markets have weakened, and this gives us some indication that valuations are beginning to look attractive.
There will undoubtedly be further volatility in the coming weeks and months, and markets could weaken further before they get better. But, crucially, selling out of investments now would mean crystallising a significant loss and being unable to participate in any recovery. We know from history that when stock markets do hit their lowest point, they often recoup some of their losses relatively quickly.
We appreciate that at times like this it is difficult to maintain a long-term perspective. However, we continue to believe that for those who have a time horizon of several years or more the best course of action now is to remain invested, diversified across regions and asset classes