Coronavirus Further Market Update

March 2020
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The escalation in the spread of the virus, as anticipated by the medical experts, is now impacting on daily life throughout Europe leading equity markets lower. We expect market volatility to continue for some weeks.

Despite this our message is the same, stay calm and stay invested. It is impossible to call the bottom and therefore the real risk is crystallising losses and being out of market when confidence returns as rebounds can kick off as violently as shocks kick in.

Critically it is a time to rely on process and data rather than being caught up in emotion.

The fall in global equity markets due to Coronavirus is not a repeat of the 2008 Financial Crisis. Both the economy and financial system are in better shape now than then. Back in 2008 the central banks were having to make up how to respond to the systemic risks as they went along. In 2020 they have the tools, contingency plans and playbook of when, how and how much to respond to shocks like this and we have seen decisive action to combat the spread of the virus and its economic impact. There will undoubtedly be more intervention from central banks, as they have as one signalled their absolute intention to support the economies around the globe at all costs and the UK Government has pledged a £350 billion support package for business and individuals. 

Current thinking from investment managers is that the virus is a 2-3 month gruesome “wave of chaos” impacting each market it infects. However, it appears that infections in China are now tapering off and if the Government led actions across Europe   are successful, then we can expect this to happen in Europe and the US. Once the “wave of chaos” has passed through developed markets the key question is will that be the trigger for a sustained recession? The market appears to be pricing in a yes answer. Once new cases are tapering off, will those depressed valuations looked justified or be a buying opportunity?

We have faced many significant and volatile investment times in recent decades. Remember Black Monday which happened on Monday 19th October 1987?

The following chart shows the dramatic effect of that day’s shock on the UK FTSE 100 stock Market.

Past Performance is not a reliable indicator of future results

Over Monday 19 October and Tuesday 20 October 1987, the FTSE 100 fell 23%, still the only two 10%-plus daily falls in the index’s history (including recent events), but over the subsequent five years, it produced a total return of 74.8%.

There have been other more recent shocks such as the 2008 Financial Crisis and the 2011 Debt Ceiling Crisis which had marked short term market downturns:

 

Past performance is not an indicator of future results

But both these events showed a significant recovery in the short term :

 

Past performance is not an indicator of future results

Turning to the current situation and your money. Whilst it can be easy to think your funds are falling in line with stock markets around the globe, that is not the case for the vast majority, even our higher risk clients.

At LEBC we have long expressed the virtues of diversified portfolios to spread risk, mapped to individual clients’ own risk tolerance and to minimise downside risk where possible. The benefits of this have been seen in the past few weeks. While we understand that to obtain real returns, ahead of inflation, we need to accept some risk, the majority of investors do not want, or need to take a full market risk.

The very nature of diversified portfolios allows for some protection from the full exposure to equity markets and our various portfolios have performed ahead of market performance over the year to date.

For the year to 16th March 2020 the FTSE 100 is down 30.94%. 

Performance Source FE Analytics

For lower risk investors the performance of bond and gilt funds has provided some protection against the full force of the equity corrections and has indeed benefitted from Central Bank action to cut interest rates. Our lower risk portfolios are down between 4%* and 13%* since January 1st 2020.

The same can partly be said of our mid-range risk clients with less bonds and gilts but did have the benefit of global equity diversification, where in sterling terms, overseas equities have performed better than UK equities. Our mid risk funds are down between 16%* and 20%*.

Whilst it is true that our higher risk clients have suffered the highest volatility, they too have had the protection of diversified portfolio’s offsetting some of the market losses and are down between 19%* and 25%*.

Performance Source – FE Analytics

  • Individual  actual fund performance depends on your specific risk profile and actual underlying investment solution and may differ from the numbers quoted.

If we look back over 3 years the out performance of our portfolios is significant:

Low risk investors with returns in the range of -1%* to +4.5%%.*

Medium risk investors in the range of -3%* to -8%*

High risk investors in the range of -8%* to -20%*

All against the FTSE 100 performance of -28.69%

Performance Source – FE Analytics

  • Individual  actual fund performance depends on your specific risk profile and actual underlying investment solution and may differ from the numbers quoted.

This takes into account the current coronavirus corrrection.

If however we were to look at the three years to the end of 2019, which excludes the Coronavirus effect, the picture is dramatically different

Low risk investors with returns in the range of +7%* to +18%.*

Medium risk investors in the range of +17%* to +24%*

High risk investors in the range of 21%* to +31%*

All against the FTSE 100 performance of +5.59%

Performance Source – FE Analytics

  • Individual  actual fund performance depends on your specific risk profile and actual underlying investment solution and may differ from the numbers quoted.

While I appreciate that showing paper “losses” is never pleasant, we have been here before and investments have recovered strongly before. It is also worth reflecting that around half of the return from the FTSE 100 is comprised of dividends and staying invested will mean that dividends from those companies which are robust, and in some cases benefit from the eperdemic, food retailers and producers, sanitary and medical supplies, telecommunications, will continue to make profits and pay dividends, partially offsetting  the disruption to business in other sectors.  

Time is our friend when investing. 

Derek Miles
Chair Investment Committee

 

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