Market Update – Coronavirus
You will be aware that growing concerns about the impact of coronavirus (COVID-19) have recently spread to global markets, as investors scrabble to quantify the impact of the illness on the global economy. Our first thoughts are of course with the victims of this latest global virus, but we are also acutely aware of the immediate impact this has had on investment assets and how this may be a cause of worry for our clients. We are watching markets closely but would acknowledge that it is very difficult to see when the current level of market volatility will stabilise. That said, we would reiterate that volatility is a normal feature of markets. For markets more generally, it is worth putting the recent volatility in context. The most recent bout of volatility has undoubtably delivered some significant drawdowns in global equity markets, but this follows a strong year of performance in 2019 when the FTSE All Share delivered a total return of 19.2%. These types of event will always have an effect on markets and have been followed by a recovery, but only time will tell the duration and extent of the impact in this particular case. According to Citi research, epidemics in the past 20 years have caused falls of varying lengths between 6% to 13% on the S&P 500 (source: www.cnbc.com) There are lots of studies out there which show the futility of trying to time the markets to avoid short term losses or capture market recoveries. Indeed, trading in and out of the market around this volatility can actually have a detrimental effect on long term returns. Not to mention the negative impact of short term trading on the continuity of dividend payments, which are also an important component of total investment returns. We take a long-term view of investments and that sometimes means looking through short term market falls in anticipation of longer-term gains.
In view of this, I would also highlight that we seek to build diversified portfolios for our clients and dependent on a client’s attitude to risk and objectives, this will mean holding a range of asset classes, sectors and geographical exposures. Importantly, not all assets behave the same way in a “risk off” event. Where we invest in multi asset strategies, there will be underlying assets that have actually increased in value over the past week, as equity markets have fallen (see chart below).
Our panel of investment funds will include many equity focused funds that are deliberately more defensive in character and the benefits of this have been witnessed over the past week. Whilst these funds have fallen in absolute value along with broader markets, they have typically fallen less than the market, which is what we would expect of such strategies. As an example, our global equity income funds have delivered returns between -3.3% and -3.9% this week, whilst the FTSE World index fell 6.95%. Our core multi asset strategies, have fallen between 1.05% and 1.25%.
In summary, we believe that you should remain focused on the long-term investment strategy, as your investment portfolio has been constructed in line with your individual risk constraints and return objectives. We would emphasise the benefits of diversification, both within exposures to a single asset class and through exposure to a wider selection of assets (e.g. bonds and commodities). We will continue to monitor the performance of your underlying holdings to ensure that they behave as we would expect and continue to offer potential for good long-term returns. We remain vigilant to what is happening in wider markets and will contact you if we believe further action is required.
If you have any questions or concerns, please contact your adviser.