Coronavirus & markets – 16th March 2020

Coronavirus & markets – 16th March 2020

The escalating medical crisis due to the spread of the Coronavirus has now impacted on investment markets. Up to 20th February markets were still trading at high levels as, what was, a localised outbreak in China appeared little threat to the global economy. Even as China imposed severe restrictions to curb the spread of the coronavirus, markets fell a little but stabilised relatively quickly. However, as it became evident the virus was spreading around the world quickly, markets reacted; on 9th March the FTSE 100 fell -7.8% and then a further -10.9% on 12th March, the latter being the markets biggest 1-day fall since Black Monday in 1987.

To what extent these market falls represent a realistic appraisal of a quickly changing situation is unclear. In every market downturn, panic replaces rationality and investors sell today at any level, just in case tomorrow is worse. The key concern is that the increasing restrictions countries are employing to slow the spread of the virus (eg lockdown in Italy, travel restrictions, school closures) will impact on economic growth and corporate profits. This is clearly a risk in the short-term but less obvious in the longer-term.

Governments are employing different strategies to try to manage the spread and are using fiscal levers to support individuals and businesses. Central banks have reduced interest rates and are providing extra liquidity to prevent the financial system freezing. Unfortunately, the situation is unprecedented which creates uncertainty and the one thing markets hate the most is uncertainty.

With such fast-moving and uncertain situations, it is very difficult to get a sense of the likely direction of travel. With any market downturn, you only know you have reached the bottom when you’re looking backwards. From an investment perspective, the key thing is not to panic and sell when markets are down, as that only crystallises the position and makes it certain that you cannot participate in any upside. At some point, the virus will subside, economies will get back to normal, people will go shopping and book holidays, businesses will get back on track, profits will rise again and markets will go up.

Focus on your objectives and your original investment time horizon. As long as that has not changed, then there is no reason to do anything. In fact, there are times in life when doing nothing is the best thing to do. And, if you need to make any large purchases or commit to any spending, then remember your emergency fund, the money you have in cash at the bank or building society or with National Savings; that’s what its there for after all. This gives your investments time to recover and you can then replenish your emergency fund later when prices have improved.