As you are no doubt aware, the coronavirus (COVID-19) has had a sudden and substantial impact on global investment markets. The sell-off is continuing. The investment committee at CXC Financial Partners has been busy over the period, reviewing our clients’ portfolios, considering the potential impact and of course, looking for opportunities.
We are available anytime to discuss your concerns and we encourage you to get in touch on 1300 925 081.
What has happened?
The coronavirus surfaced in a Chinese seafood and poultry market late last year and has spread throughout the globe. It’s understood that the bulk of those who have contracted coronavirus will experience mild symptoms and many are therefore not reporting for diagnosis or treatment. This makes data analysis difficult, but also increases the likelihood of the virus spreading.
Many medical experts have likened the virus to the common flu, which in some ways plays down the health risk. The immediate problem is now becoming more obvious – the impact this virus is having on the media, market sentiment and across industry.
With uncertainty on if (and when) the spread of the virus can be contained, panic has been the primary driver for many investors:
Market performance chart
This will be another event on a crowded historical timeline.
What is the outlook?
The depth and breadth of the market decline will likely be linked to the worlds ability to contain the virus. The important question is, has the full impact already been priced into the market? To make a highly complex situation relatively simple, we have commented on two potential outcomes:
1. Containment within a relatively short period
If the virus is contained in a relatively short period of time (e.g. a steady decline in new cases over 12-18 weeks) we feel the recovery period will be significantly shorter (likely within 12 months).
- a) Prior to the virus, investors held a positive view on the markets, with our flagship balanced fund returning over 17% for the 2019 calendar year. This performance continued to mid February despite the devastating bushfires. After such significant drops in value since then, it’s likely those who have significant cash within their portfolios will begin re-purchasing assets they feel are now undervalued.
- b) If China can get back on track the ‘worlds factory’ will begin production again and the impact to business will be minimised.
2. A prolonged period of contamination
This will have a much greater impact on the global economy:
- a) Manufacturing is already being affected. As an example, many car plants across China have been temporarily closed. This impacts the likes of General Motors, Honda, Volkswagen and Toyota and their ability to maintain operations at all locations. As supply chains break-down one step in the process prohibits the progress of the next. The longer this continues the deeper the impact.
- b) So many businesses across the world, large and small, have an involvement with China. Airlines, clothing brands, transport and tourism are obvious choices to feel the effects initially and most already have.
- c) Central banks have been using economic stimulus to add spark to their economies with varying success, since the 2008 Global Financial Crisis. This approach has taken its toll and many countries are finding themselves running out of ammunition to fight slow economic growth and unemployment. A prolonged battle with coronavirus is likely to push these nations, and potentially others, toward a recession.
- d) History has proven that when a correction reaches 20-40% in magnitude, the average recovery time for stock markets to recover is 15 months, if it continues beyond 40%+, then this timeframe almost quadruples to 58 months. We are currently around 15-20% off the Feb market highs at the time of writing.
In addition to these challenges crude oil prices have suffered their biggest daily decrease since the 1991 Gulf War. Saudi Arabia and Russia are currently locked in a price war and have confirmed that production levels will be increased potentially flooding the markets with cheaper oil. This is a good result at the bowser but hasn’t helped jittery financial markets. This oil price drop impacts energy share prices, as producers reduce spending in anticipation of lower revenues (e.g. expenses remain broadly similar but profits are decreased due to lower margins). The US listed shares of BHP dropped 16.5% and Rio 9.4% in overnight trading (9/3/2020).
Should you consider selling?
First, to help frame your thinking, we suggest you ask yourself the following questions:
- What will I do with the proceeds? Am I prepared to ride out this volatility, keep losses unrealised and in exchange receive a yield that’s traditionally higher than interest rates?
- Do I need access to a material amount of this capital in the next 12 months? E.g. a pending property purchase?
- How will I feel if the market sees further losses? Hypothetically project forward and ask yourself, will I stay rational or will the emotional trigger be switched in face of unrelenting media news and I’ll be forced to sell at an even lower price in a few months time?
- Is it time to be a contrarian? Can I buy some good quality assets for a material discount to prices only a month ago?
If you don’t require access to cash most would council you to take no action. Successful investing is based on buying low and selling high – when you sell in a falling market you accomplish the opposite.
If you were to sell now, it’s easy to think “I’ll re-buy at the bottom” but there’s no way to know when the markets will hit rock bottom. You may also have a sudden and substantial recovery is mis-timed. Experience has taught us that timing the market is nearly impossible and most who try fail.
In a recent update, Vanguard (one of the worlds largest fund managers) had the following:
- “As ever, we hold to our Principles for Investing Success. Discipline, especially, is essential in times such as these.
- Investors who abandon their well-considered, long-term financial plan rather than staying the course through a recovery could cause themselves lasting harm.
- Investors mostly have experienced gains for the last decade; it’s important to remember that equity markets are filled with ups and downs, but have traditionally rewarded investors over the long term.”
While we appreciate it’s an emotional time, with potential for a level of anxiety around financial markets, we feel this is a sound statement and a good approach for many.
Capitalise on opportunities
While the value of assets is falling, if you may have an opportunity to invest from cash reserves, we’d suggest it may be a good time to seek advice in this area. A staggered approach is also possible in this circumstance. If considering this strategy, please ensure you have a discussion with a qualified advice professional before acting.
Investing in financial products comes with inherited risk and it may not be right for you. Talk to a CXCFP adviser to see how we can help you.
While every attempt has been made to ensure the accuracy of this information at the time of compilation, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by CXC Financial Partners Pty Ltd (CXCFP), its officers, employees, agents or authorised representatives.
All contents presented within this document are not to be construed as personal financial advice, taxation advice, a recommendation or an offer or invitation to buy, sell or hold a financial product. It is for general informational purposes only.