23 March 2020

Market Update 3: COVID-19

News & Insights

Roisin Duffy

Market Update 3: COVID-19

News of the spreading virus and the unprecedented response from governments around the world continues at a pace. What we are now witnessing is a simultaneous and voluntary shutdown of the global economy and this has unsurprisingly sent shockwaves through investment markets. There are two main aspects to the economic shock now unfolding. Firstly, there is the impact from labour shortages directly caused by sickness from the virus. The second factor relates to containment measures which effectively means social distancing and self-isolation which has a direct impact on supply and demand for individuals and corporates. There has also been a realisation that historic levels of stimulus will be required to support many sectors of the economy. The inability of economists/investment professionals to accurately predict the path of the crisis, means that it is very difficult for the market to find stability in asset prices. It is really the medical/scientific data which will guide the market direction from here and we would suggest that it will be the medical data which will ultimately lead the recovery in markets. On a positive note, it is worth noting the stabilizing picture emerging in China and South Korea in terms of virus containment. With this update I think it is worth breaking down some the factors that are in our minds as we navigate these uncertain times.

We have seen dramatic moves in markets in response to the situation. At the same time, a dispute between Russia and Saudi Arabia has led to a collapse in the oil price. Bonds and commodities have sold off providing less of an offset to equity allocations in recent days. This included gold where investors have moved from what is traditionally seen as a safe haven store of value to what is perceived as the ultimate form of liquidity, cash. Currency has also come into play. The US dollar has behaved in line with its safe-haven status with sterling falling to its lowest level against the dollar in decades. Some of these movements may be reflected in the underlying values of your portfolio, positive and negative, but our method of constructing portfolios puts heavy emphasis on diversification by asset class, geography (ultimately, this includes currency) and industry/sectors. This should help to insulate clients from some of the dramatic movements in individual assets, markets or currencies.

Our recent fund manager meetings indicate that they are not making rash decisions to overhaul portfolios with excessive trading and panic buying or selling. Whilst they expect the economic fallout from COVID 19 to be severe, they suggest that the broad market sell off has presented significant valuation movements in favoured areas of the market. Some are reducing their lower conviction holdings in order to raise cash and enable them to drip feed into new stock opportunities as they arise. We are given confidence by this cautious approach. Certain areas of the markets are undoubtably more directly impacted by the effects of the virus outbreak. For example, those companies with exposure to travel or hospitality. Active management should help to navigate this new investment landscape by focusing on company fundamentals, which may mean avoiding those companies with weaker financials and focusing on the more robust business models.

We give a lot of resource to our fund selection and the ongoing investment research process at Five Wealth. This is not only about the style of investment, philosophy and process. Whilst these factors are very important, we do also place weight on the fund manager, whether this is one or two individuals or a more collegiate approach and this is why we emphasise the vitalness of fund manager contact. In all cases, we have confidence in the expertise of these management teams, reflecting the depth of knowledge, skill and experience that has helped them navigate multiple economic and market shocks over the years.

I would reiterate that our central belief is that whilst it is difficult to see a swift resolution to this situation, we do believe that both markets and economies will ultimately recover. We will continue to review events as they unfold and will contact you if we believe any action is required in relation to your investment portfolio. In the meantime, if you have any concerns, please do contact your adviser to discuss this further.