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Every so often financial markets experience panic selling and fall significantly in a short period of time. This was seen in the 1997 Asian crisis, in 2001 after 9/11 and in the 2008/2009 financial crisis. In each case, whatever the catalyst, there were elements of concern that markets might cease to function effectively and fears that liquidity would dry up. We have seen similar market movements in the last month and, for the UK, the last week proved to be a tipping point as efforts to contain and control the spread of the coronavirus were stepped up. Nevertheless, in the month between 20th February and 20th March our model portfolios declined less than the FTSE 100, which dropped -29.68%.

The ultimate economic impact of the coronavirus will depend on how widely the epidemic spreads and how long it goes on for. This is unknown at the moment. Whilst, according to official figures, cases have been contained in Asia; Europe, the UK and the US are still in their containment, testing and shutdown phases in the battle against COVID-19. Governments worldwide have been quick to react with fiscal and monetary stimulus. In particular, UK authorities have announced unprecedently low interest rates and massive government spending and tax cuts to support businesses and individuals through the shutdown. The major issue which developed economies are facing is a sudden steep drop in consumption for many services and some products, with people being advised by their governments to stay safe and stay home.  If the outbreak in the UK, Europe and the US follows the same path as in Asia, however, then economic recovery is possible later in the year, all though this is by no means certain.

Looking at stock market history, following previous “bear markets” (stock market declines of over 20%) there has often been a significant rally in equities as markets recover.  For instance, in the 1987 crash the FTSE All-Share lost -37%, but had recovered enough to deliver a 4% gain for the calendar year. In 2002 there was a -22% drop in the same index, followed by a +21% recovery in 2003 and a further 13% total return for 2004. In 2008, the year of the credit crisis, the FTSE All-Share dropped -30%. Following the introduction of liquidity via quantitative easing these losses were erased by the 30% gain in 2009 and the index was up again by 14.5% in 2010.

Whilst past performance is not a guide to future performance, we believe that economic recovery will eventually occur, although we have no means of knowing when, and that equity markets will move upwards once economic indicators improve. For this reason the Investment Committee consider it important to stay invested and to avoid crystallising losses. The Investment Committee is in regular touch and is reviewing and assessing all relevant data and information as it becomes available. We will keep you updated during these extraordinary times.

This article is for information purposes only. It does not constitute investment advice and is not a recommendation to invest. The value of investments and the income from them may go down as well as up and you may not get back your original investment.  Past performance is not a guide to the future.

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