Chief Investment Officer Tom Beal gives his view on how investors should respond to the sudden market downturn.
It has been two months in the making, but this week global investors decided that the new coronavirus, COVID-19, had reached a critical phase.
The virus is undoubtedly now a major global threat, with a range of potential economic and financial implications. However, we believe that it is very hard, firstly, to predict how much more it will spread and, secondly, to forecast its economic consequences with any great certainty. Instead, investors should remain focused on their own long-term financial goals.
As of 28 February, the official death toll is approaching 3,000 and there are now more than 80,000 confirmed cases of infection (see latest figures).(1) However, what is concerning health officials is not just the absolute numbers but, even more, the geographical spread of the virus.
What had been a Chinese problem has, over the past fortnight, begun to look more like a global problem, with major spikes in the infection rates in Iran, Italy, South Korea and California over recent days, as the Chinese rate has slowed. Inevitably, some of the most productive economic regions are most at risk, due to their huge flows of tourists and business travellers.
Capital Economics forecasts that the virus may cause the first quarter of negative global growth since 2009. Oxford Economics predicts that the globalisation of the virus will knock 1.3% off global growth this year – the equivalent of $1.1 trillion in lost income.
These economic implications have worried investors, especially in the last few days. Major indices like the S&P 500 and FTSE 100 have taken major falls this week, knocking them into correction territory. Gold and US Treasuries have benefited as investors have sought out safe havens. There is no doubt that, for the moment at least, COVID-19 is the major short-term driver on markets.
Already, there are signs that central banks are poised to step in. Gavekal, a research institute, believes the US Federal Reserve may cut interest rates to prevent an equity market selloff, potentially buoying the price of gold, weakening the dollar and encouraging other central banks to follow suit.
The current crisis is not without precedents, and many analysts have been comparing the economic impact to what happened during the SARS outbreak in 2003. However, China is vastly more economically significant today than it was then, and now accounts for around a sixth of GDP, making the SARS comparison of only limited value.
As markets battle volatility and news of the virus fills headlines around the world, it is natural for investors to feel a sense of unease. The virus’s unpredictability and its economic impact are unsettling, and it can be difficult to watch the value of investments fluctuate.
While these periods of uncertainty may be uncomfortable, they should still be approached with reason. (VUCA, a framework first developed in the US, can offer a useful starting point.) If your investments are balanced between regions, sectors and asset classes, that in itself offers some natural protection for your portfolio through diversification.
Furthermore, our fund managers are constantly monitoring markets and make investment decisions that are in your long-term interests, factoring in risks like COVID-19 in order to ensure their investment strategy is not at risk. Ken Hsia of Investec, manager of the Continental European and Greater European Progressive funds, believes that, for long-term investors, there may even be buying opportunities. “While we took pre-emptive action at the beginning of February, we are also conscious that highly correlated market selloffs can also create investment opportunities in fundamentally solid businesses.”
Indeed, one of the greatest risks as an investor is to sell in haste and out of fear when markets fall. At times like these, an active approach can be very beneficial, since professional fund managers are making the decisions on your behalf. But by keeping an eye on your financial goals, you can ensure that sudden market corrections don’t end up harming your long-term plans.