COVID -19 and the investment markets

26 Mar 2020
John Drysdale
A 10 minute read
by Jon Drysdale

Investment markets in turmoil

Following weeks of turbulence on global stock markets you may be concerned about how this affects your investments and wondering if you need to take any action.

What just happened?

The value of stock markets fell swiftly when it became apparent that COVID-19 is likely to have a severely negative impact on global productivity. Since mid-March this quickly escalated to fears of a full-blown global recession and as countries across the planet lockdown their citizens this has become a near certainty.

Prior to recent events the underlying global economic situation could be described as ‘healthy’. Banks were/are well capitalised directly as a result of the 2008 financial crisis. Western governments were shrugging off a decade of austerity and our major companies had strong balance sheets. Trade tensions between the US and China had softened and Brexit trade deals were being conducted with a positive trajectory. All of this is now at stake. Global stock-markets have indiscriminately priced in the future risk of recession to the world’s major economies. In times of economic crisis markets fall and ask questions later.

What can we do about it?

Central banks, specifically The Bank of England and the US Federal Reserve were quick to provide reassurance of support in the inevitable economic down. Interest rates are now close to 0% in the US and UK. However, it quickly became apparent that restriction of movement would have devastating effect on corporations and their employees. Astonishingly, in a desperate attempt to avoid mass unemployment, corporate failure and the chaos that might have ensued, governments began to underwrite or heavily subsidise the salaries of workers. Notably and more recently the US and UK have pledged massive packages of support for their economies and corporations. This may yet make the 2008 bailout look like a small overdraft in comparison.

Apart from the lifeline that these measures offer individuals and companies there has been a positive impact on global markets. On March 24th the Dow Jones (the main US stock market) recorded its best day since 1933. Gains such as this are not a recovery but are perhaps the tentative green shoots of stability. We may look back on this as ‘the end of the beginning’ of the 2020’s market woes, although it is too early for predictions.

Is this the same as the last financial crisis?

Whilst the sharp falls in stock market values might appear similar those of 2008 the underlying reasons for this are very different. First, the current economic woes are akin to a natural disaster rather than underlying economic problems. It remains to be seen how long a shadow this will cast. Will the recession be short-lived once the virus recedes? Are we facing a new age of austerity?

How does this affect my portfolio?

The value is very likely to have reduced as a result of stock market falls. However, your portfolio probably has exposure to other assets such as government and corporate bonds and commercial property. This means that your investments won’t have fallen as much as the headline indices (e.g. the FTSE 100).

Do I need to do anything?

In such times of market volatility, especially during sudden and unexpected market downturns, the best advice is not to make any immediate changes. For example, suddenly reducing your exposure to share-based funds at this time could mean you miss out on the inevitable upturn. If you move funds into cash any recent losses could be unnecessarily ‘crystalised’. As such we do not recommend any change to your strategy. If you are making phased withdrawals from your portfolio then these can probably continue. Needless to say, that fund managers will be taking steps to minimise volatility within their investment funds where possible.

Our experience of past market volatility shows that keeping a long-term perspective is the best approach. To put a number on this you should expect to invest for a period of at least 5 years. Bear in mind that no stock market downturn has lasted longer than 2 years. Some may view the recent market falls as an opportunity, although we might reasonably predict that there will be much more volatility and economic pain to come.

Author's note: The investments markets and global economy is volatile at this time. Please don't rely on our commentary to make financial decisions. We advice you seek individual advice before making any changes to your financial plans at this time.