Equity markets endure steepest falls since 2008
The huge falls in equity markets in recent weeks have prompted comparisons with the global financial crisis of 2008 – an event that has defined the last 12 years. Certainly some of the price reactions and search for liquidity take me back to 2007/08. However, there are key differences.
The 2008 crisis was a result of significant problems in the financial system, rather than as a result of an external threat, like the coronavirus. If there are any consolations in the current crisis, it’s that the banking system has spent its time wisely over the past decade retaining profits and growing lending at a slower pace, leaving the system with a much stronger capital position to weather this particular storm.
Markets react to uncertainty
Markets have fallen so much because investors hate uncertainty, and the rapidly changing situation is one of the most uncertain situations investors have ever faced. As a result, they’re reacting to this by selling anything they consider too risky. This has included equities, as well as bonds issued by companies (corporate bonds).
The money has then been reinvested in assets like government bonds. These tend to be popular during periods of uncertainty as they have the potential to provide a relatively reliable income and governments are generally less likely to default on bond interest payments than companies. Many investors are also keeping the sales of assets in cash, in particular dollar cash, which has also resulted in large swings in the foreign exchange markets.
An economic downturn now seems inevitable
The measures currently being taken to prevent the spread of the coronavirus, including the implementation of extreme containment measures, along with supply chain disruptions, and the current spike in financial stress, are combining to create a huge demand and supply shock for the global economy. This week’s announcement from the UK Prime Minister of an effective “lock-down” of the UK economy is but the latest example of the extreme containment measures being undertaken.
Unfortunately, the questions remaining are only how deep and persistent the downturn will be. In early March, we officially lowered our forecast for global growth this year to 1.7%, which would already be the third weakest year since 1980. This now looks optimistic.
The outlook beyond this year is obviously very dependent on the success of the containment policies now being pursued – but these policies are designed to allow long-term gain for short-term pain. The apparent success of policies like this in China and South Korea, and even the hint of the containment measures starting to achieve their aims in Italy, should give us hope that we can achieve this longer-term gain.
Different markets, sectors and companies will be affected differently
Of course, certain markets, sectors and companies are already looking particularly vulnerable to the effects of the virus outbreak – whether because of already high debt levels, exposure to travel and tourism, or disruption to supply chains. But not all markets, sectors and companies are as exposed to these factors as much as others.
At Aberdeen Standard Investments, we’re focussing on the areas which are least exposed to the impact of the virus, and on companies with robust finances and business models. We also believe that some investments are being sold indiscriminately. This could be an opportunity to invest in high-quality and resilient companies that have been caught up in indiscriminate selling.
There are no companies that will be unaffected by the outbreak, but some will emerge from it in better positions than others. Some too, will be better equipped to cope with what will undoubtedly be a very different economic and market environment, when the virus has passed.
Keep calm and don’t try to time the market
Given the recent very sharp falls in markets, at Aberdeen Standard Investments we don’t think there’s much benefit in selling investments now. We’ve seen the worst falls since 2008, which may well have already factored in much of the economic damage that the coronavirus outbreak will do. Investors who sell out now risk locking in losses rather than avoiding further falls.
We’ll be looking for tactical opportunities for our portfolios. But it’s important not to get sucked into attempting to ‘time the market’ as being able to judge the bottom of a bear market is notoriously difficult. We believe it’s time in the market, not timing the market that matters. We believe that both taking a long-term view with investments, as well as spreading them across assets remains the best course of action.
You can keep up to date with Aberdeen Standard Investments’ views and insights on the impact of the coronarvirus here.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on Aberdeen Standard Investments’ understanding in March 2020.