Update on the Markets - the Effects of Coronavirus

Insight | by Robert Harris

The reaction to the Coronavirus has caused abnormally high levels of volatility within global stock markets. Self-isolation means that fewer people are in the workplace leading to lower production levels, breakdown of components being delivered and supply-chain disruption for manufacturing companies. Self-isolation and the fear of contagion has had a massive impact on the travel industry, in particular airlines and hotels. The drop in supply and demand will have an immediate effect on corporate profitability and thus share prices. In response, Central Banks stated that they will provide help and the US Federal Reserve cut its interest rate by 0.5% on 3rd March and the Bank of England has cut interest rates to 0.25%. A long-term perspective is important at these times, as investors are becoming increasingly concerned about the economic damage caused by the spread of Covid-19. While there are many ways this virus can impact the assets in which you invest, it is important to separate permanent damage which will impact the long-term fair value of an asset from temporary damage which will quickly be forgotten.

  • It is important to highlight that the Next Generation Morningstar strategies were well structured leading into this, with a diversified investment mix that was on the defensive side and biased to undervalued assets. Morningstar believe the strategies will remain equally well-structured coming out of this, because their approach is sensible and built in line with your risk tolerance.
  • It is our strong belief that you make money by “time in the markets” rather than timing the markets. Looking at the performance of the strategies back tested over the financial crisis of 2007/8 we can see that all the strategies fell and rebounded in exactly the way we would expect. Whilst every cycle is different, we would expect a similar result.

Morningstar have also researched the impact of the most recent epidemics on stock market performance below

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For the most cautious investors, the cautious strategy has fallen by only 0.2% year to date (as at 11th March) and the adventurous strategy has fallen 12.4% compared with European markets falling over 20%.

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If the impact is short-term, price declines may produce buying opportunities. Warren Buffett, chairman and CEO of Berkshire Hathaway, said recently that “you don’t buy or sell (a) business based on today’s headlines. If (the market) gives you a chance to buy something you like and you can buy it even cheaper, then it’s your good luck.” Some asset classes appear attractive through this lens; however others continue to remain unattractive despite the recent falls.

If you have any concerns or questions, please contact your adviser.


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