Last Updated: Friday 28th February 2020
Global markets have seen a significant sell-off this week due to the increasing concerns of the coronavirus and the impact it is having on the global economy.
We are seeing further volatility today.
It is true – as the media is keen to report this morning – that the stock market falls experienced in the past week is one of the biggest single-week declines we have experienced since the financial crisis of 2008/2009. However, this needs to be put into perspective after the significant stock market climb we have experienced since the beginning of last year. Yes, the US S&P500 suffered its largest ever one day drop in points terms on Thursday, but this 4+% drop is steeper because of the altitude. The index is already at record-breaking levels, which should be remembered when we compare it against historic falls that originated from a smaller starting base.
The headline equity market falls are what everyone sees, but most clients do not have a 100% exposure to markets, and during this period fixed interest holdings/GILTs(government bonds), and absolute return strategies have provided some protection to portfolios.
Historically, short term economic crisis and panics that stimulate both large policy easing and collapsing risk free rates result in strong subsequent equity/share returns.
With regard stimulus, it is notable that Hong Kong yesterday approved a budget simply gifting every person aged over 18 US$1,275 gratis. Macau is issuing time dated free shopping vouchers. It has also been reported that the Chinese mainland will follow suit once it is safe to encourage people to go out and spend. This is the kind of helicopter money Ben Bernanke (former Chair of US Central Bank) dreamed of, but never implemented in 2008/09. Furthermore President Xi has nailed his political flag to 6% growth in 2020 and raising living standards. After the scandal of the initial Covid 19 cover up both are vital for the existential health of the Communist party. This makes massive stimulus very likely.
The support from Central Banks and Governments will help support markets and the wider economic impacts, with further fiscal stimulus and interest rate reductions very likely globally.
Some investment managers are now looking at using some of the cash held to buy equities, and whilst there is no guarantee we are at the bottom of the market, they feel that on a long term view that this will be beneficial for portfolios.
When equity markets settle, they will go back to looking ahead. In a years’ time there could be a vaccine in place and this particular crisis may be over. In the meantime, central banks will probably have added more liquidity and bond yields should still be low, if not as low as they are today. When that happens, investors will realise that equity markets are still the place with the best long-term returns.
We are monitoring the position closely, and if you would like further information specific to your circumstances, please contact your adviser in the normal way.