The last couple of months have felt like a rollercoaster ride for many investors. Financial markets around the world are reacting to the uncertainty around the impact of the Corona virus (“COVID-19”).
The continued spread of the virus and the disruption to supply chains across the globe has begun to filter through markets, causing the heightened volatility that has been witnessed over the past few months. While it’s still relatively early to determine the extent of the impact, certain sectors and companies will face significant pressure on earnings the longer the virus remains uncontained.
Supply chains have already started to see the effects of factory shutdowns. Hubei province, the epicentre of the virus outbreak and an area under significant quarantine, is a key location for electronics and technology manufacturing. Additionally, commodity imports into China have been disrupted as factory shutdowns have halted the manufacturing sector’s demand for external resources, such as petroleum and metals.
The extended closure of Chinese industries, restrictions on people movement, disrupted supply chains, declines in key commodity prices, bans on travel and the flow-on effect to confidence will impact the countries and regions most heavily reliant on China.
Ultimately the full impact will be determined by the rate of spread of the virus and the medical and scientific communities’ ability to develop a treatment that can be distributed at scale.
Investors have endured days of increasingly grim updates on the spread of the virus, as new infections continue to rise even as countries enact unprecedented measures to contain the outbreak.
As such, we want to arm our clients with information to navigate this period of market volatility.
Remember why you’re invested
Short term volatility understandably causes anxiety for investors who get nervous and look to veer from the original strategy. It is key to reinforce the purpose of why you are investing in the first place. Most people are investing for the long-term, so we can’t let short term volatility destroy the intended investment strategy, by selling down risky assets at precisely the wrong time.
In the short term markets can be volatile, however, over the long term, history has shown that markets tend to move in cycles. While markets face periods of rapid decline, they eventually recover and move on to reach new highs. For example, the market down turns following the September 11 terrorist attacks in 2001 and the global financial crisis (GFC) of 2008 were both eventually followed by a strong market recovery.
Diversification
It’s important to remember that during periods of increased volatility in financial markets, remaining diversified can help manage your exposure to risk. Investments can be diversified across different asset classes, industries and countries as well as across investment managers with different approaches. When building a diversified portfolio, it is important to consider the ‘role’ each strategy will play in the portfolio. No one type of investment, asset class or investment manager provides the best performance over all time periods. The idea of diversification is to smooth your returns so they are more consistent and better for a given level of risk over the longer term. One of the most effective ways of reducing investment risk is to diversify across a range of asset classes.
Time in the market – not timing the market
Trying to time the market is fraught with danger and is near impossible. While markets can face periods of rapid decline, history has shown that they eventually recover and move on to reach new highs. It is important to remember, whilst the market has experienced negative performance over the past few months, global equities have rallied off the back of central banks injecting stimulus into the global economy and liquidity into financial markets. Selling down after these losses have already been incurred could possibly lead to missing some of the best gains in the future.
