By any standards, this has been quite a week. The correction in stock markets that we witnessed on Monday set the tone for what was a very volatile few days. Despite its dominance in the news, the moves in the market at the beginning of the week were predicated not by coronavirus, but by a spat between Saudi Arabia and Russia following an Organisation of Petroleum Exporting Countries (OPEC) meeting in which the two countries were unable to decide on cuts to supply.
Saudi Aramco (Saudi Arabia’s national oil company) then offered unprecedented discounts to customers in Asia and Europe and is planning to boost production. The lower prices and prospect of a huge glut of supply pushed oil prices down over 20% since Friday and has led to contagion in the markets. Coupled with coronavirus, this has led to increased volatility.
Although temporarily distracted by the situation in the oil markets, coronavirus came back into the spotlight in the blink of an eye. The situation in Italy led the government to quarantine sixteen million people and was followed up by President Trump’s address to the American nation and the implementation of a politically motivated travel ban on all Europeans (excluding the UK and Ireland) from travelling to the US. This speech further spooked the markets, which at this point were struggling to find good news and were sensitive to any bad information.
Yesterday saw global markets bear the brunt of the bad news with significant sell-offs across the board. The sell-off started in the early hours in Asia and was followed by the FTSE 100 (the main UK market index) and one of the main US’s stock market indices, the S&P 500. Both the FTSE 100 and the S&P 500 ended the day down more than 10%, the largest single-day fall since 1987.
Having communicated with a few clients questioning whether they should sell investments, we would caution, as always, against a knee jerk reaction to move to cash. We continue to reiterate that it is ‘time in the markets and not timing the markets’ that matter. Market timing is not a successful strategy because it requires two optimal and timely decisions – getting out and then getting back in, which is almost impossible to achieve, even for 50% of the value raised when initially moving to cash.
Time out of the market also means the loss of valuable dividend income which cannot be replicated from deposit interest, especially with low interest rates. We stress the importance of spreading risk with diversification, time in the market, allocating the assets in a measured approach taking into consideration risk, periodic rebalancing, risk monitoring and portfolio construction as far more useful tools than attempting to speculate on short term moves.
Assets such as government bonds, corporate bonds, infrastructure, commodities and commercial property can all provide a useful cushion during times like this and generally help to mitigate paper losses elsewhere. We would reiterate that equity markets historically recover and bounce back and when they do, it is usually very quickly. It is better to be invested at this point.
Please be assured that we are monitoring the markets and the coronavirus situation very closely and will update you as and when new developments arise.
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