There is no doubt the COVID outbreak has been a worrying time. We all have family or friends who are either elderly or in higher-risk groups. It is, of course, the fear of the unknown both in terms of what the outcome will be, and how long it will take before we finally come out the ‘other end’ that troubles us most.
It is this same fear that caused significant turmoil in the financial markets earlier this year, especially from late February through March and April. Whilst the number of deaths from this pandemic put ‘things financial’ into proper perspective, it is our job to keep you informed. As financial advisers, it is our day-to-day commitment to help you with your long-term investment planning and to ensure that there is appropriate diversification within your portfolio.
Whilst we have seen some steadying of markets over the summer, volatility has edged up again in the last few weeks. This is due to concerns regarding the impact that a second wave – and another series of lockdowns might have on the global economy.
Following the initial onset of the pandemic, clients contacted us with concerns and questions regarding their investments, and what they should do.
We thought it would be helpful to provide a taste of the most common questions we encountered, and our responses to them. This will hopefully give you our candid view of where we are, and the outlook ahead.
Q: What has been the effect of coronavirus on markets so far?
A: Having experienced a strong 2019 we went into 2020 fairly buoyant and generally stock indices were close to their highs on the back of a generally positive economic outlook.
However, bad news came in the evidence of Coronavirus spreading outside of China, into Italy initially, and subsequently establishing a firm foothold in Europe and the Americas. The result was an initial sharp stock market sell-off as the bad news got priced in. Since then, markets have recovered a good deal of their losses, though day to day volatility has been on the increase more recently, due to concerns over the economic impact of a second wave.
Q: How much have markets fallen? How low can they go? Can they recover?
A: If we look at things in UK FTSE-100 terms, at the beginning of 2020, the market stood at around 7,500 points. By mid-March, it had dropped to around 5,000 points, which means the UK stock market had fallen by as much as a third in the first 11 weeks of the year.
Since then, there has been some retracement, and the FTSE-100 spent much of the summer around the 6,000 mark as optimism grew that lockdown had been effective in containing the virus, and markets have recovered around half of their losses.
Other global indices, such as in the US and Japan, whilst impacted significantly, have actually recovered better than the UK, which illustrates why having a globally diversified portfolio can help.
We can’t know how low the markets can go, or if indeed the (in FTSE-100 terms) sub-5,000 levels we saw in March will turn out to have been the low point.
However, past experience illustrates that market corrections are typically followed by a recovery. In 2008 – the worst year of the financial crisis, although the UK stock market fell as much as 42% from the start of that year, it had recovered virtually all those losses by the end of 2009. I would encourage you to read our ‘Guide to Investment’ which puts short-term market volatility and corrections into context against longer-term returns and strategy.
Q: Should I sell my shares?
A: It is notoriously difficult to ‘time’ markets. Certainly, selling out of investments when they have fallen in value is not typically a sensible approach; it crystallises a paper loss into a real one. As someone neatly put it “shares are the only thing that people want to sell when the price drops and buy when the price is up”. It is important to ‘Keep Calm & Carry On’ and remember that an investment strategy should be for the long term, and the bumps in the road – however pot-holed – are part of the journey.
Q: Why have markets been so volatile?
A: Right now, markets are concerned about the degree of disruption caused by the measures (such as; lock-downs, the limited ability for some businesses to trade, and travel restrictions) being implemented in the developed world to contain the virus. These have inevitably had an impact on the demand and supply of goods and services (travel being an obvious one). This resulted in a 20% drop in the UK’s GDP in April. Whilst the uncertainty around these exists, it is likely ‘market volatility’ will remain higher than normal.
Only once markets feel that Governments have the pandemic under control and have taken sufficient measures to protect the global economy, might market stability become established.
What’s Legal & Medical’s view of the markets?
It is clear that markets, although they are no longer as skittish as they were in the early weeks of the pandemic, are continuing to come to terms with COVID-19, and to price in the risk of the virus. Whilst there are no guarantees, history does show that markets do recover from events such as these, as we saw with the Financial Crisis.
Whilst the coronavirus is not going away anytime soon, central governments worldwide have already cut interest rates to record low levels. They have been injecting billions of dollars’ worth of stimulus measures into their economies, to at least soften the blow, if not to avoid a recession. Whether this downturn lasts a year or so – or proves to be more protracted – we do believe recovery will come.
The best course of action is to maintain composure and hold positions, particularly as portfolios are typically well-diversified.
This article does not constitute and should not to be regarded as investment advice and you should engage the services of a financial adviser to look at your specific circumstance.
Please be aware that the value of investments linked to the stock market may rise or fall depending on market conditions and that you may not always recoup your initial investment. Past performance should not be seen as an indication of future returns.