Investment Values

Market Commentary

While the recent falls in your investment values can be worrying over the short term for inexperienced investors, I am sure, like us, you remain positive for the long-term prospects of your portfolios. We would urge caution and restraint in these volatile conditions and do not recommend any change to the agreed investment strategy in light of recent events. You are investing in line with your risk profile and time horizon and, as such, should remain invested in accordance with this, rather than try to time the financial markets.

Key Factors

Some of the key factors affecting recent investment performance include:

• The large-scale quarantining in Italy and continued spread of coronavirus elsewhere has raised fears of reduced global demand.  This has been compounded by OPEC failing to agree to a cut in oil production, with Russia refusing to agree and Saudi Arabia responding to this by cutting the oil price and suggesting they will instead increase production. This is spurring an oil price war that is targeted at getting more marginal producers to close down production, particularly US shale producers. With reduced global demand and threatened increased supply, the oil price fell 30% on Monday morning. The UK equity market dropped 7.7% on Monday with oil companies leading the way down and, in the US, the Dow Jones was down around 7.8% on the day.
• Government bond prices are up, and yields fell sharply with the ten-year gilt now yielding just 0.08% and US Treasuries 0.45% for ten years.  As risk comes off and the interest rate differential declines, the low yielding currencies have risen. Thus, the Euro, Yen and Swiss Franc have risen against the US Dollar. The pound against the Dollar has been lifted by the strength of the Euro.

Equity Exposure

Fund managers have been debating whether to add equity exposure now shares appear cheap but, at this stage, have decided not to increase exposure yet. Your existing exposure is biased to quality growth companies that have generally outperformed the falls in the markets over the last two weeks and the bond positioning has helped to offset some of the worst of the markets. Some of the reasons to hold back for now are as follows:

• Clearly the Coronavirus will have a negative effect on GDP in the first half of this year, but the duration of the effect is uncertain. Airlines, travel companies and related industries are likely to be hit particularly hard and may be slow to recover. When China closed down due to the Coronavirus the fears were over the supply chain. As China appears to be getting over the virus with few new cases reported, production is resuming, and these supply fears are now being replaced by fears of reduced demand due to the virus and wholesale measures to counter the spread. In a year’s time we may see a sharp recovery, but we cannot be sure that the maximum impact has been priced in.
• Oil price falls would normally be positive for consumers outside the oil producing regions of the world. However, as a result of Coronavirus, consumers may wish to delay spending. Shale oil producers and those involved in the retail and travel sectors may see layoffs increasing unemployment.
• Equity earnings and dividends look very attractive relative to bond yields.  In the credit crisis the earnings on the US S&P 500 index fell 35%. If this was repeated the equity market could still look attractive long term but investors may take time to adjust to this scenario especially as we may see some companies cut their dividends.

Equity Market

The question as to whether to buy into the equity market comes down to the question have we reached maximum fear yet? Buying feels like catching a falling knife and for now fund managers are not confident that this point has been reached. However, whilst not relevant to your models, investors who have been partially invested, or sitting on the side-lines, should see this as an opportunity to gradually increase exposure rather than cut risk.

Ultimately, we advise that we trust the investment fund and portfolio managers as this is not a time when we want to make tactical plays.  We simply do not have a big enough crash to enable us to feel that these are more likely to work for us rather than against us.

Contact Us

If you want further information regarding investments and/or pension funds, contact us at Brooks Wealth for a free initial consultation.