Coronavirus: looking beyond the market turbulence

As the rapid spread of coronavirus rocks global markets, we are keeping a steady hand and focusing on a longer-term investment horizon.  

We believe the key will be to look beyond the short-term turbulence and emotional reaction in markets and see this as a short-term issue. It is important to assess the medium to longer-term impact for a potential recovery in investments and we do not see the need to change your investment strategy at present.  

Support for the UK Economy

There has been an unprecedented response in the era of central bank independence from the UK Government and the Bank of England. They provided a sizeable, coordinated package of measures to support the economy in the face of the outbreak.

The Bank of England cut interest rate by 0.5% and announced a comprehensive package to support bank lending to businesses. This will allow the banks to provide immediate support of up to £190 billion, which was 13 times the amount of UK business lending in 2019.

On the same day, the largest sustained stimulus budget since 1992 was delivered by the new Chancellor, with a stimulus package worth £30 billion in year one. £12 billion of this is to provide direct support for the coronavirus.  

The NHS was provided with unlimited resources to help it tackle the threat. 

The other aim was to provide help for households and small and medium-sized businesses, including more widespread sick pay, reduction or exemption of business rates, deferral of VAT and PAYE/National Insurance contributions, and a new temporary loan scheme with a Government guarantee.   

China

The rising number of new cases around the world has been worrying, but there are a few things to be relieved about and could provide us with insight into how countries could recover.

Within China, the original epicentre of the outbreak, there has been a substantial decline in new cases, with now only a handful of new domestic cases per day. Importantly, there has been a decline in the proportion of cases reported as severe. 

In China, measures were brought in to halt the spread of COVID-19, including stopping the movement of people and closing industry temporarily, which is now happening elsewhere around the world. The result is workers are starting to return to key cities and we are seeing tentative signs that manufacturing is returning in the country, which will be key for China’s recovery and global supply chains.  

Impact on Stock Markets

When stock markets have been driven by uncertainty and emotion, they are quick to react and the impact can be dramatic, but history shows it can bounce back strongly over time.  

In October 2008, during the Global Financial Crisis, the US stock market fell 9% in a day and returned back to the same level by September 2009. The return after five years from this fall was 109%; or an annualised equivalent of 15.9%. 

During Black Monday in 1987, the US stock markets fell 22.6% in a day. In the five-year period afterwards, the average annual performance was +14.7%. Whilst past performance is not guaranteed, the data underlines the historic resilience of stock markets over longer timeframes.  

Outlook

Before the outbreak started, the global economic outlook was looking positive, and there is a hope there could be a sharp “V-shaped” recovery, however, a more gradual “U-shaped” recovery is also a high possibility. 

We are in regular contact with our fund managers, who are assessing the situation very closely and even using the opportunity to invest in companies which have good quality earnings and fundamentals but are now much cheaper than they were. 

We have seen positive action from the UK Government, Central Banks, including the Bank of England and US Federal Reserve, and the ability of the Chinese authorities to handle the outbreak.  

Further co-ordinated support from Governments and Central Banks globally will be needed in the short term to help limit the damage to the global economy. Hopefully, in due course, each country will also reach peak infection and things will then gradually start to return to normal.

We believe diversification is important and is at the heart of our investment process. We have diversified your investments, which is essential during times of heightened volatility to offer downside protection while ensuring future participation as stock markets recover and rise.

History has demonstrated that stock markets often overreact in the short term. 

What we know so far suggests the right approach is to keep a steady hand and avoid selling amid these turbulent times to seek long term investment returns.