It’s impossible to escape news around coronavirus and its continuing impact on the markets, which is having a knock-on effect on Wealthify Plans at present. The latest unrest is partly a result of President Trump banning flights to America from the European Schengen area, which has seen record drops in the US markets and echoed across the globe.
But the drop in share price could provide an unusual opportunity to buy shares at hugely discounted rates compared to just a couple of weeks ago. It’s also worth noting that a downturn in Plan values won’t become “real” unless investments are sold, and in the past markets have always recovered from extraordinary crashes.
We’ve been working hard to keep our customers informed over the last few weeks, and we will continue to monitor financial markets and global news as we focus on protecting our customers’ Plans.
First things first, why is COVID-19 impacting the stock markets?
To understand this, we first need to tell you how the markets work. The reason any money is made by investing in stocks is because you’re taking a risk, and part of that risk means that you may lose money in the short term, which needs to be balanced against the hope for greater gains in the longer term.
Now, there are many things that impact the returns investments make. You could see investments in a single company drop, potentially to zero, taking the value of that investment to nothing. Which is why we always spread the risk and diversify our Plans with shares, bonds, property, cash and commodities from around the world, to reduce your level of exposure to specific types of investments.
However, sometimes the whole market goes down, which can have a significant impact on an entire Plan. While the direct reasons for market downturns can change, it’s generally down to three underlying concerns. One, people are worried about the future, or two, they’re responding to a media frenzy, or three, economic supply and demand are out of balance. In the case of coronavirus, we are experiencing all three at once.
The effects of coronavirus on investments
Because COVID-19 is highly contagious, we’re seeing countries stopping public gatherings, restricting travel, delaying international sports fixtures, and closing workplaces.
While these measures are having a significant impact on travel and leisure, the shutdown is likely to have the biggest effect on the markets due to a slowdown in manufacturing, which affects both businesses and consumers alike.
The outcome of a slowdown in manufacturing is known as ‘supply shock’. Disruption to a supply chain caused by closing down a production site can have a big economic impact, as the knock-on effect could reduce the output of other companies, which in turn could impact more companies, which in turn… you get it.
This is not to be confused with the toilet paper and pasta shortage we’re currently seeing in our supermarkets. That’s panic buying, causing a temporary uplift for supermarkets, but an indication that we’re likely to see a greater reduction in spending as people put off things like nights out, holidays and luxury purchases.
The Budget Announcement 2020
If you watched the budget announcement earlier this week, you’ll be aware that our new Chancellor, Mr Sunak, has promised a £12billion fund for ‘temporary, timely and targeted’ measures to combat COVID-19. This is in addition to the £33.9billion increase the NHS is likely to see by 2024.
So, what was the impact of this on the stock market? Well, even before the Budget, early trading saw the FTSE100 rise by 1.35%, after the Bank of England unexpectedly cut interest rates in a direct response to shield the economy from the impact of coronavirus. This saw share prices in major UK banks, including Lloyds, RBS and Barclays, rise between 1% and 2%.
Although the budget announcement itself didn’t have an immediate impact in propping up the market, the underlying support shows the government is taking action and will do more if needed. It could also present significant opportunities for growth over the next five years – which is why it’s always worth thinking about the long-run!
However, this stability wasn’t to last. And when US President Donald Trump announced his ban on flights to the US from 26 European countries, the FTSE100 sank by more than 10.81%, with similar declines seen across European markets, and it was followed by more losses on the Dow Jones, which fell by 9.99%.
What has Wealthify done to counter the impact?
When the market dips like this, everyone feels the impact. However, the effect is different across investment types, so while share prices around the world have fallen, bonds have generally increased.
We treat our customers’ money like it’s our own, so acted in their best interest by selling some of the government and corporate bonds, as we feel the rise in bond prices is inflated. We have then recycled these gains into shares where the prices have dropped more than we believe is justified.
As the markets continue to be turbulent, our Investment Team is keeping an eagle eye on what’s happening and will make changes to your Wealthify Plan as and when necessary.
What happens next?
Uncertainty about what happens next is driving much of the current market turbulence.
We’ll continue to monitor financial markets and global news as we focus on protecting our customers’ Plans. It is possible that the markets may decline further, which can be uncomfortable to watch, but we are focused on the long-term, and there’s every chance that the markets will recover and in time return positive growth.
The longest ever dip in the global market started in 1972 and lasted over two years, but by 1975, investors who held their nerve would have been back in profit.
At Wealthify we’ve built our customers’ portfolios with the knowledge that there will be good times and bad times. Our more cautious plans allow greater protection from big market swings, whilst our more adventurous plans aim to maximise potential growth in exchange for an increased risk.
If the current market conditions are making you feel uncomfortable, it could be worth considering changing your investment style. You could also use our Cash Park facility and that way we can invest it again for you when you want to get back in the markets.
Please remember that past performance is not a reliable indicator of your future results.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.