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Coronavirus Market Update

The latest view from our Investment Team

24th March

With the global coronavirus outbreak continuing to develop at an alarming pace, the economic impact is now expected to lead to a significant short-term decline in activity. Whilst supply disruptions are a negative factor, it is the collapse in demand across many areas as a result of social distancing measures that is now doing the most damage.

The hoped for policy response from central banks and governments for substantial support for the global economy and to ease some of the stresses appearing in the financial system has been forthcoming and at unprecedented levels. We have seen interest rates cut to record lows, massive asset purchase programmes, emergency lending facilities and major fiscal stimulus and support packages to try and avoid mass lay-offs.

Given the truly unprecedented nature of this medical crisis, markets are still uncertain as to whether these actions will be sufficient to counter the significant financial and economic costs of the pandemic, but authorities seem committed to do whatever it takes.

We are already seeing many companies slash their sales and profit forecasts and cut their dividends to preserve cash, but the support measures being taken to help viable companies through this economic shock should prove vital to begin giving investors confidence that these companies can survive until conditions return towards normality.

In addition to the extent of the economic damage, the other key consideration for markets is the development of the virus. Whilst some parts of the world such as China are already through the worst, the major economies of Europe and the US are yet to peak, and investors will be eagerly watching for signs that the measures being taken will get the virus under control. Italy is at the forefront of the epidemic and when their new cases begin to decline it may give encouragement to markets.

With the economic damage potentially on a scale similar to the 2008-09 financial crisis, investors are also becoming nervous over the emerging signs of additional stresses in parts of the financial system, although authorities are acting to support the smooth functioning of markets.

While the scale and depth of the crisis has continued to escalate, we remain optimistic that after the painful short-term impacts there will be a substantial recovery in activity and longer-term economic and corporate prospects will not be significantly damaged.

With large declines in global equity markets, losses in corporate bonds and an expected decline in some commercial property values, most investment portfolios have been having a difficult time after a long period of gains. We are still in the eye of the storm and volatility is expected to remain at elevated levels, but a lot of bad news has now been factored in by markets and current equity valuations look attractive in most scenarios. Investors are understandably very nervous, but should try and retain a longer-term focus if possible and look through to the eventual recovery from this short-term crisis.

18th March

The pace of development of the spread of coronavirus and the measures being taken to reduce public interaction around the world have escalated beyond previous expectations.

It is now clear that the extensive reduction in human contact in coming weeks is going to have a significant short-term impact on a number of industries and overall economic growth will be much reduced in 2020.

However, central banks and governments are increasingly taking unprecedented actions to help bridge the anticipated drop in economic activity and support fundamentally viable companies through this difficult period.

Investors are understandably very nervous in the current environment. However, once markets gain comfort that vulnerable companies can survive through this crisis then it is reasonable to expect that economic activity will rapidly return towards normality when the virus has worked its way through and companies will recover.

Authorities are providing extensive support to business, but it will need to be seen as sufficient enough to avoid widespread business failures in order to support investor confidence.

The other factor that will help risk appetite recover will be signs that the spread of the virus is beginning to peak outside China. It is anticipated that evidence of that happening in Italy could be another key catalyst to give confidence that the radical actions being taken are working and that other countries like the UK would likely follow a similar path.

Developments in China and South Korea and the history of previous outbreaks give us some confidence that conditions will normalise.

Whilst most of the focus of investors has been on the volatility in equity markets, elsewhere we have seen a recent significant drop in sterling which provides some support to returns on overseas equities for UK investors.

In the fixed income world, we have seen an increase in UK government bond yields from the early March levels of around 0% and corporate bonds have seen more substantial increases in yields as risks have risen.

Coronavirus has rapidly emerged as the dominant short-term driver of asset markets and investor sentiment, but there are reasons to be optimistic that after some painful short-term impacts and temporary lifestyle changes it will pass without doing substantial longer-term economic or corporate damage.

Whilst heightened volatility is expected to continue for now, for investors with a longer-term focus and the ability to withstand the volatility we are beginning to see some increasingly attractive investment opportunities in equities following the significant market falls.  

11th March

Read views from our Investment team following further falls in stock markets, oil prices and interest rates, as the economic impact of Coronavirus continued this week. 

With the spread of coronavirus and the growing economic impact of the preventative measures being taken, investors have become increasingly risk averse. Already nervous markets were further impacted by the collapse in oil prices, as a failure to agree production cuts in response to falling demand led to a price war. Whilst lower oil prices are ultimately good for many, it raised concerns over the health of oil companies and the impact on banks and investors that lend to them.

More countries are resorting to extensive preventative measures to stop the spread of the virus and relatively less impacted countries so far like the UK and the US look like they are heading down a similar path. The short-term economic impact now looks like it will lead to a slowdown or mild recession before the virus dies down and economies return towards normality.

Clearly there are business casualties in certain areas, and Flybe will not be the only corporate collapse. However, there are already signs that the virus is peaking in early impacted countries like China and history suggests that economies and markets will not see significant long-term damage.

Central banks and governments are beginning to take action to support economies and companies through this temporary downturn, such as the cut to the interest rates and budget measures announced by the UK on Wednesday 11th March.

 There are some signs of minor stresses in the financial system, but unlike 2008 the health of the banking system is in a much better place to withstand this volatility so there is nothing to suggest this economic slowdown will develop into a wider credit crunch.

Investors need to be mindful that further short-term market weakness is possible if the impact of the virus escalates beyond current assumptions, but with equities having now fallen around 20% from their recent peaks there is a lot of bad news now priced in.

Fixed income assets and cash continue to provide support to balanced portfolios in times of market stress, but UK government bond yields are now close to 0% so investors should be mindful that future return prospects in this area may be limited at best.

Whilst investors need to be prepared for the increased volatility that comes with equity investment, there are growing relative valuation attractions now available in equities on a medium to longer-term view.

6th March

Hear from our Investment team on the impact Coronavirus is having on the markets.

Coronavirus and its potential impact on the global economy has rapidly emerged as the key driver of asset markets and investor sentiment in 2020.

The initial consensus was that this was likely just a temporary and largely localised issue mainly effecting China, with a similar modest impact to that seen in the 2003 SARS outbreak. With equity markets at close to all-time highs in early 2020, this view left equities vulnerable to a spread of the virus and following significant growth in cases outside China there has been a rapid and substantial drop in equities and a flight to invest in assets such as government bonds and cash.

China is now a much larger part of the global economy than it was in 2003 and current data is showing their extensive efforts to isolate the virus have led to a dramatic slowdown in their economy. China is also vitally important to global manufacturing supply chains, so their shutdown will be having a further impact on the wider global economy. With the virus now in many other countries, the economic impact is set to spread as preventative measures such as travel restrictions, the curtailing of mass gatherings and school closures hit growth.

With the recent double-digit equity declines, the initial market complacency is now over and moderately negative scenarios have now been priced in. Investors will be closely watching the development of the virus and any actions the authorities are taking.

Although previous epidemics – such as SARS – can give us some reassurance that impacts are short-lived, it should be acknowledged there are potential scenarios from a sustained Coronavirus outbreak that could have a more severe long-term impact on the market.

Further market weakness is possible, but there are a number of reasons why investors should not panic.

  • Central banks have been key to the recovery since the financial crisis and they are poised to act decisively once more to support growth, although their impact may be limited
  • Also, after many years of austerity, there are growing expectations that governments such as the UK will be shifting towards more expansionary fiscal policy which will support economic growth
  • Whilst markets will remain nervous until we see a peak in cases outside China, there are already some encouraging signs that the robust measures taken in China may have succeeded in containing the rate of spread of the virus
  • Trying to time the market is notoriously difficult, long-term investors should remain calm, and retain well-diversified portfolios.
  • Once the virus impact settles down, there is nothing to suggest that the global economy will not return to its previous growth rates after the short-term shock
  • Whilst it is too early to confidently call the market bottom and we must be prepared for more volatility, as long-term investors we are beginning to see some more attractive medium to long-term opportunities as equity valuations have become more appealing following the market falls.

Please note the value of your investment can rise or fall and you may get back less than you invested.

Why financial planning is important in these times

The Coronavirus impact on the markets may have you thinking, ‘how does this affect my financial plan?’ All of us will have different financial lives and plans but here are some key points to keep in mind:  

  • Volatility is normal in the markets recognising that Coronavirus has caused severe impact. Identifying the top and bottom of the market is notoriously difficult. Selling after a large fall often means that investors miss out on any subsequent upturn.
  • Holding a diversified portfolio that gives you exposure to shares, bonds, property and cash can help reduce the impact of market volatility as falls in one part of your portfolio may be cushioned by positive performance in another
  • Investment managers may see falling share prices as an opportunity to invest in companies they see as having good longer- term prospects. Expert buying in this way can bring investors benefit over time
  • It’s important to focus on your original reasons for investing. Meeting regularly with your NFU Mutual financial adviser can help you make sure your financial plans stay on track.

To find out more please speak to one of our financial experts.