As coronavirus (COVID-19) has continued to spread, market attention has risen. The virus has increased investor caution, impacting global stock markets. Naturally, many investors are concerned about their investments after the recent market downturns.
We’ve asked four key questions to our Head of Investment Strategy, David Semmens, to help you understand the impact of coronavirus on the financial markets.
What’s been the impact on financial markets since the coronavirus was discovered?
David Semmens: The extent of the recent turbulence shows how the markets have undoubtedly been taken by surprise by the geographical spread and economic impact of COVID-19. Based on current news reports, we see significant economic uncertainty as businesses are impacted by measures introduced to slow the spread of the virus. However, we do not expect to see any sustained market decline, as such outbreaks don’t tend to have long-term economic impact – although the difficult short-term effects cannot be ignored.
Whilst this may not provide comfort to investors reviewing their portfolios over the last couple of months, it’s important to keep in mind that trade, business investment and consumer spending are likely to be delayed, rather than eliminated.
There’s also many unknowns over the wider economy as there has been little economic data that reflects the period of infection outside of China – which has resulted in emotion, rather than facts, driving financial markets at present.
How have markets and governments reacted to the coronavirus?
David Semmens: Many global markets have seen their quickest ever entry into a bear market – when stock prices fall 20% from their highest point [1]. The radical drop in market sentiment compared to the start of the year is largely fuelled by panic. Although market prices are experiencing unsettling swings, we are nowhere near overall declines seen in the global financial crisis of 2008.
Global governments are acting and introducing measures to limit the spread and help restore market sentiment. It is undeniable that the current constraints on the public to limit interaction will hit restaurants, cinemas, sports venues, tourism and travel – this will be particularly difficult to weather if these emergency measures last into the summer period. However, assuming that in the coming months infection numbers plateau in the rest of the world as they have in parts of Asia, especially China – the original epicentre – this should allow a return to normality, which could help markets recover, if other countries follow suit [2].
But, even now, there are reasons to be positive.
As new cases have slowed rapidly in China, there has been a gradual return to work. This should limit the supply chain disruption that was the initial economic concern at the start of this crisis. But it also shows that containment methods would appear to be working.
Similarly, global governments and central banks have taken pre-emptive action to provide support to financial markets, businesses and individuals. This has taken the form of cutting interest and tax rates, providing subsidies and increasing government spending.
What should investors do?
David Semmens: Many investors are anxious, and that’s understandable. The coronavirus is not to be taken lightly, especially as we don’t yet know its full medical or economic implications. But as an investor, it’s important to stay calm and think about the long-term.
For historic comparison, it’s worth noting that in the twelve months that followed SARS (2003) and the Swine Flu (2009) [3], Emerging Market and Global Market shares experienced a sentiment-led dip, but quickly returned to rise above their pre-outbreak levels. If this pandemic were to burn out as quickly as it came then we would look for a sharp rebound, both in markets and economically.
What is different this time, is that coronavirus has also led to an ‘infodemic’. In other words, market reactions have been excessively driven by the significant amount of information shared over social media, which is intensely focused on the tragic human cost and potential economic impact of the virus. This has been unprecedented in its scale.
The important thing to keep in mind is that your investments may go down in value, but investing should be for the long-term. Seeing the value of your investments drop can be unsettling, but until you sell, your potential losses remain hypothetical.
Your losses only become real if you sell – so, when you’re investing for the long-term, it’s important to be patient and try to keep your nerve. Whatever happens, remaining invested could help you ride out the bumps, as history shows us that markets have always recovered from previous dips.
How prepared is Wealthify?
David Semmens: We’ve kept a very close eye on the potential economic and market outcomes of coronavirus and have made adjustments to customers’ Plans to purchase those assets we feel have declined below their fair value. But we have been cautious to shelter your investments against unnecessary risk taking.
At present, the panicked response and media frenzy surrounding the virus continues to drive the market impact. If coronavirus follows a similar pattern to prior outbreaks, we would expect any dip in the economy to be temporary, with the accompanying rebound quickly supporting market recovery. The exact timing of this remains uncertain, and as always we encourage our customers to take a long-term view on their investments. Even more importantly, is to take care of yourself and others, particularly the vulnerable, during this difficult time.
As ever, if you have any further questions about your Plan, don’t hesitate to contact us – we’ll be happy to answer all your queries.
1: Bloomberg data
2: https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6
https://www.safetydetectives.com/novel-coronavirus-ncov-real-time-report/
3: https://edition.cnn.com/2020/01/29/china/sars-wuhan-virus-explainer-intl-hnk-scli/index.html
Past performance is not a reliable indicator of future results.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
