From record highs in the Stock-markets at the beginning of the year, the Coronavirus pandemic, an event unexpected in its arrival has been unprecedented in its effect. Stock-Markets endured their worst 3-week period in history, while liquidity in the bond markets evaporated. Interest rates were cut to zero and governments in the UK and the US were forced to inject “wartime levels of investment.”
In the modern day, there are few parallels to the current economic environment. Unemployment is growing and the second quarter earnings are predicted to fall by 15-20%. As new cases of the virus level off, however, both measures are expected to bounce back before the end of the year.
Predicting the path of the markets’ in these uncharted waters isn’t easy. However, as new infections in some of the worst-affected countries begin to plateau, the picture becomes a little bit clearer.
There are 3 separate, yet linked elements to the current situation we find ourselves in.
- Economic Recovery – What shape will the recovery take?
Economists are debating the “shape” of the economic recovery, once the Western world emerges from its “lockdown”. The most widely expected outcome is a “V” shaped recovery, with a sharp decline in Gross Domestic Product (GDP) in the second quarter of 2020 largely reversing by the end of the year. This is based on what is being observed in China, where the economy is returning to normal as cases of the virus decline. In such circumstances, markets would likely follow a similar pattern.
An alternative is a “W” shaped recovery, where once lockdown is eased there is a second wave of infection, leading to a further contraction in the economy. While the “V” shaped scenario appears most probable, investors should be aware of the risks that restarting the economy without a surge in new cases will take a delicate balance.
- Financial Crisis – Central Banks will do whatever it takes
This has largely been averted due to the massive stimulus by central banks by cutting interest rates close to zero and restarting quantitative easing. This has in turn helped boost investor sentiment and these initiatives have helped improve liquidity and unblock credit markets, thus helping to stabilise the economy.
- Medical Crisis – The push towards finding a vaccine
Whilst we cannot ignore the incredible impact this virus has had on lives and families around the world, new cases of infection and deaths are generally slowing down and governments are planning the gradual ways of exiting the lockdowns. There is some phenomenal work from scientists around the globe looking to create a vaccine for the virus and use known drugs to ease the effects on human lives.
Opportunities for long term investors
Global Stock-markets are looking through the current situation and attempting to predict the situation in the next 6-12 months and beyond. For investors with a medium to long-term time horizon, the current sell-off of shares that we have experienced presents a number of opportunities. In the Great Depression, a downward ‘bear’ market with a decline of greater than 30% was followed by an average 70% return in the 2 years following the low point. Whilst today’s circumstances are different, there is reason to believe that global stock markets that looked expensive at the turn of the year could now offer more reasonable valuations with good opportunities going forward.
We will continue to work with you to assess your objectives and ensure you have a well-balanced portfolio that matches your appetite for risk and capacity for loss. We will consider what the impact the current stage in the economic cycle has on your exposure to various assets. Remember, volatility can be partially mitigated by diversifying investments suitably across a broad range of asset classes.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]
The views and opinions contained herein are those of Loughtons Independent Financial Advisers and may not necessarily represent views expressed or reflected in other economic communications, strategies or funds.
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