Global Update – Written on the 10th March 2020

The disruption and uncertainty triggered by the coronavirus outbreak has raised the key question of whether the impact will be short-lived or will mark a longer-term inflection point for the global economy – perhaps even a recession. The effect that the virus has now had on Italy, with the whole country in lockdown, shows the wider ramifications of the virus from its Asian origins.

Estimates very much vary as to the impact on global GDP and attempting predict this seems foolish at this time, whilst the true effects of the virus on the wider economy is relatively unknown. We are, however, somewhat concerned on two key aspects:

Attitudes in the west towards the virus: Half-hearted containment in the west has seen reported cases rising significantly across Europe and in the U.S. Cases in Asia have dropped significantly, particularly in China. It is clearly much easier to enact an effective lockdown in a dictatorship for ideological reasons – the Western world has long been attached to the idea of freedom. But unless complacent attitudes are replaced with careful behaviour, Europe and the U.S will not be able to contain this outbreak, in the way it wants to.

Relevant to the above point but also below, is President Trump’s blasé approach to the virus. As one commentator put it ‘President Trump’s inaction on this virus could be one of the worst policy mistakes in U.S history since the Iraq War.’

Healthcare in the U.S: The country is now a few weeks behind Europe in terms of the virus outbreak. But, with the European healthcare systems under visible strain, the U.S presents a significant problem, not least the response from the government. It is being reported that, unlike the European cost of €75, a testing kit for COVID-19 in the U.S is reported to be $1000. This could be damming for poorer parts of the U.S population who do not have access to healthcare, leading to high infection rates and unaccountable spreading of the disease. It is figures such as this that makes one realise how fantastic the NHS really is!

What effect does the above have on global markets?

As can be seen in the falls experience on 9^th March, in what is being dubbed as ‘Black Monday’ by commentators, the above has fed into the markets considerably already. The ‘targeted relief’ that was eluded to in our last blog post, seems to be few and far between from national governments. Monetary policy of interest rate cuts needs to be followed by short term fiscal reliefs – otherwise the market will deem the response to be inadequate. It seems that we should be prepared for many more months of significant volatility in the markets.

Given all of the above, however …

Investing in the stock market can be very rewarding. However, as share prices fluctuate, it is also possible that you can lose money. This can particularly be the case when you react to short-term stock market falls. Those who sell or delay making new investments when stock markets become uncertain are actually employing a strategy known as ‘market timing’. The intention is often to invest once stock markets have calmed down or to buy when stock markets have gone even lower. This can be a very dangerous strategy.

Sharp falls in stock markets tend to be concentrated in short periods of time. Similarly, the biggest gains are often clustered together. It is also quite common for a large gain to follow a big fall (or vice versa). Accordingly, an investor who tries to anticipate when the best time is to invest runs a very high risk of missing the best gains. This can have a big impact on their long-term return.

To help illustrate this, Fidelity (full article can be found in the news section of the Greenfields website in a post on the 26^th February) have analysed the average annual return from the UK stock market over the last 15 years. As the chart shows, missing just the ten best days over this period would have cut your annual return substantially. Timing the stock market is extremely difficult, the best policy is usually to stay fully invested over the long term.

We will continue to monitor the ongoing global situation and will write to you with any changes that we feel are necessary within your investment portfolio.

Written by Greenfields Financial Management Ltd.

This article is for information only and should not be treated as advice. No action should be taken in respect of this article without independent financial advice. This information represents the opinion of Greenfields Financial Management Ltd. only.

General References

Fidelity investment article – ‘Coronavirus: will there be a global recession?’ written on the 03/03/20.
Macro Voices Podcast – Taken from a podcast on the Macro Voices website named ‘All Starts #96 Juliette Declercq: How to trade the COVID19 Crisis’
Link from Macro Voices podcast – Associated to the above is the supporting materials download from the Macro Voices podcast that is given above. Supporting documentation named ‘A real macroeconomic plague – MARCH 2020’.