The Covid-19 outbreak is rapidly evolving as we speak and changing on a daily basis, if not hourly! The spread is exponential and market declines have been significant over the last week or so. Governments around the world are imposing emergency powers to deal with the health crisis and the financial and economic fallout. This is unprecedented and life is not normal at the moment. There is however, clear momentum of a move from economic damage to a policy driven recovery in the hope this will turn sentiment around however, it remains a tragic situation with the number of lives lost around the globe. Despite the ongoing negative news flow around the world, there is hope in that China, where the virus first originated, is seeing minimal new cases several months after the outbreak was confirmed.
Equity indices have fallen to bear market territory and with serious earnings recession potential. After all, the US S&P 500 index only peaked some three to four weeks ago. However, this is not a situation that we have faced before. Looking back to the previous financial crisis in 2008, this had long-lasting implications as it destroyed balance sheets and had a significant regulatory impact. We are still very much in the early days of this outbreak, in the UK at least and while there will be obvious long-term implications, experience suggests that stock markets look past one-off events as more data becomes available and there are good reasons to believe that this may be the case again. Ultimately, the foundations of the world economy look relatively strong, with consumers, corporations and the financial system all in robust positions to absorb this shock.
Governments around the world are now taking action with the US Federal Reserve (15th March) dropping its policy rate by a full percentage point to 0-0.25% and unveiled sweeping actions to support financial markets in light of the coronavirus pandemic. The measures also include an additional $700bn of additional fiscal stimulus.
Likewise, the Bank of England (11th March) has made an emergency cut to base rates to shore up the economy amid this outbreak. Policymakers reduced rates from 0.75% to 0.25%, taking borrowing costs back down to the lowest level in history. The Bank said it would also free up billions of pounds of extra lending power to help banks support firms. The Bank's coordinated action on Budget day was designed to have "maximum impact".
However, Saudi Arabia and Russia have decided to start a row over the price of oil adding even more uncertainty to the global market place. Thus we are faced with two quite separate short term factors which have combined to send risk assets into a tailspin.
This remains an evolving story and we are certainly not complacent. Our Investment process is always on the lookout for bumps in the road, with the possibility of pandemic being one that we know needs close monitoring. Recent stock market falls have reflected the dawning realisation that whatever its pathology, the institutional, political and personal imperative will be to take actions that err on the side of caution at the expense of growth until the risks subside. The impact on the global economy and corporate earnings could be material, even if short-lived as part of this reaction and adaptation process. This is a natural human response to such events.
Companies, and indeed consumers, adapt and governments and financial authorities are also fully engaged in offsetting any impact that containment measures might have so the likelihood of a sharp rebound in stock markets once the worst is past is also relatively high.
Against this backdrop we are not inclined to try to sell down our exposures to fundamentally sound long term investments facing short-term disruption, in the hope of being able to buy them back at lower prices when the outlook is less uncertain. Timing the market is nigh on impossible and history dictates that markets rebound quickly and the last place we want to be is out of the market when this happens. Therefore having good diversification across a range of asset classes is something we can control and yet still remain within the risk mandates agreed with our clients.
The balancing act to riskier assets such as equities, for example in a balanced portfolio is a holding in fixed interest securities such as corporate bonds and Gilts and while we don’t necessary see much value in these, we have always maintained an appropriate level of exposure for moments such as this which we know we could have never predicted.
It is notoriously difficult to time major asset allocation moves in response to news events and a long-term approach based on a careful assessment of client risk characteristics and asset class return assumptions remains of immense value to us all. We will continue to test our assumptions against the current situation, but our ongoing strategy is soundly based on our disciplined investment process, time-tested portfolio construction methodology and the experience and expertise of the investment team. We would always remind you of the importance of a well-structured and well-reasoned approach towards asset allocation and the investment strategy employed. Indeed, this approach has served our clients well through the peaks and troughs of the investment journey over the years.