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Coronavirus – how markets have responded

March 2020

by Alex Brandreth

Coronavirus (or COVID-19) developments are moving at a fast pace, which continues to display high levels of volatility in stock markets. The below update is to give a recap on the key events that have happened, an update on how markets have responded and most importantly how portfolios are invested during this time.

Overview of key events
The number of cases of Coronavirus across the globe are increasing and the number of people with Coronavirus globally have now overtaken that from within China. It is expected that this is going to continue over the coming weeks as more people contract the virus. Governments and Central Banks have responded over the last few weeks to protect economies and support key services.  Last night, the US Central Bank, the Federal Reserve (Fed), cut US interest rates to near zero after a second unscheduled meeting this month. The Fed also announced they are going to re-start Quantitative Easing, which is the purchase of bonds and they are going to buy $700 billion in Treasury Bonds and mortgage-backed securities. This morning other central banks have responded with similar measures.  This follows on from the Bank of England which cut interest rates back to all time period lows last week and more support in the Budget. The Government announced a £5bn emergency response fund to support the NHS, and this morning that they will now give daily TV briefings on developments. Other European governments are also taking action; Spain has imposed Italy-like national lockdown as the number of cases grow and Germany closes the border it shares with five other countries.

Recent market moves
Despite the moves by central banks, stock markets are still seeing significant levels of volatility. Last week on Thursday we saw the biggest one day drop on the main UK equity market, the FTSE 100, since 1987. Global stock markets are working very closely and US stock markets, S&P 500 and Dow Jones, also fell significantly on Thursday but bounced strongly into the close on Friday – highlighting that the volatile nature of stock markets is in both directions.  This morning, European stock markets, including the FTSE 100, have opened weaker again with the FTSE down 6% at the time of writing. Looking at the last few months together, the FTSE 100 is now trading back to the lowest levels in almost a decade – a significant amount of bad news has impacted the prices of the major stock markets in a short time period.Certain sectors continue to be more vulnerable and are seeing bigger price falls than others; Airlines and companies reliant on discretionary spending are some of the most impacted areas for obvious reasons. Companies are responding; British Airways parent International Consolidated Airlines Group SA said today (Monday 16th March), that it plans to reduce capacity by at least 75% for April and May and to cut costs to mitigate the hit from coronavirus.As you would expect safe haven assets, like government bonds, are performing strongly. The UK government ten year bond yield has fallen and therefore the price of the bond increased.

With respect to commodities; the Brent Crude Oil price, one of the main benchmarks for the oil market, has fallen because of the geo-political tensions between Saudi Arabia and Russia and supply has been increased but also because demand will be lower as global growth is going to be weaker over the coming months. Gold has benefited from a flight to safety and continues to see demand.

Where are Pareto invested?
We are invested in diversified multi-asset portfolios, via the discretionary managers and managed funds. Pareto client investments are not just invested in equity markets, each portfolio is likely to have exposure to cash, bonds and alternatives.  As well as that, we are investing with experienced individuals whose job it is to understand events and respond accordingly – which is important during volatile periods like we are currently witnessing.  The overwhelming response I have had from all Pareto investment managers is that they are not panicking and making large changes. Some of them are actually using this as an opportunity to increase risk and equity exposure and taking advantage of the falls over the last month.

Stock markets have a tendency to react quickly on the downside during events like this and it’s uncomfortable. What is going on at the moment is short term volatility, but we are long term investors. Financial objectives are not going to be missed because of what happens in the next few months but 5 to 30 years into the future. We should focus on this time period to meet long term goals and (try to) ignore the short term market noise.  It is important not to panic in periods of extreme volatility and disinvest during periods like this because we could be doing so at the worst possible time.

As ever if you have any further questions or concerns, please do not hesitate to contact us.

 

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