13 Mar Coronavirus is causing economic havoc, should I be scared?
Why have markets fallen?
Global investment markets have had a tough time of late. On Monday (9th March) markets slumped as Saudi Arabia effectively entered an oil price war with Russia. The impact of coronavirus has seen the demand for oil reduce, leading to oversupply. Russia refused to cut oil production and in response the Saudis cut prices and have threatened to flood the markets. Investors are worried about the impact of coronavirus and the global economy, and a result they have fleeing to traditional ‘safe havens’ assets such as government bonds which has caused equity markets to fall. Furthermore, recent actions taken by Italy to control the outbreak has caused further distress to European markets as the impact on supply and demand of goods exacerbates the fear of a global economic slowdown.
What should you do?
When markets fall it is often tempting to exit the market in an attempt to reduce further losses but our thoughts on all of this are simple – it’s business as usual. Avoid the fear-mongering headlines and understand that you, as a client of Pentins Financial Planners, will be invested in a globally diversified portfolio which consists of a broad range of asset classes (including cash, property and fixed interest securities) designed to limit exposure to extreme stock market movements.
This diversification across asset classes means that even as equity markets have declined, gains in some of the other asset classes will have partially offset these declines. While most of our client portfolios will have seen losses (at least on paper) over the last few weeks, over a one-year period the vast majority of our client’s portfolios are still in positive territory thanks to some excellent gains since the UK General Election. As the chart below shows, based on a £100,000 starting portfolio, clients invested in our typical middle of the road passive portfolio recommendation (Parmenion Global Value & Small Risk Grade 5) (Balanced)) Portfolio would have seen the value of their portfolio increase to approximately £100,475 – so marginally positive for the year. In contrast a FTSE 100 portfolio would have decreased in value to approximately £87,872. This reiterates the importance of making sure your portfolio is well diversified internationally and across asset classes.
Markets have been kind to us over much of the last decade and we have been positioning those clients who are drawing an income from their portfolios to hold a ‘reserve fund’ in cash to protect against the need to continue drawing on investments during times of depressed markets. We have already mentioned that over one-year the vast majority of our clients’ portfolios are still in positive territory therefore at the present time it is very much business as usual, however, should the recent market volatility continue and portfolio values continue to decline, we will likely recommend clients ‘turn off’ the income from the investment portfolios and start utilising their ‘reserve fund’ to give the portfolios a chance to recover and maximise future income sustainability.
How will coronavirus affect the markets over the medium-longer term?
We don’t have a crystal ball, but for those of your particularly worried about the lasting effects coronavirus may have on global markets, we urge you to look at the following statistics. If we look at how markets performed during prior epidemics (e.g. Ebola in 2014, SARS 2003) we can see that markets not only recovered quite quickly from these events but often went on to post record highs. While we are not trying to downplay the seriousness of COVID-19, we do believe those who continue to take a rational and pragmatic buy-and-hold approach to investing will be rewarded over the longer-term
I, for one, will still be booking my 2-week summer holiday abroad and view the recent market volatility as an opportunity to continue contributing to my ISA and pension portfolios at discounted prices.
If you’d like to discuss your own portfolio or any other aspect of your financial planning, please do not hesitate to contact the office on 01227 931531.
We will post updates to the website, www.pentinsfp.co.uk and our Facebook page so please log on and start following us @Pentinsfp so you will know immediately if our thinking changes.
Daniel Barrett DipPFS