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Concerns over the spread of coronavirus and its potential impact on global growth dominated financial markets in February. Equity markets fell sharply, whilst investment grade bond prices rose in the main, once again underscoring the need for a mix of assets within portfolios. Our model portfolios include both equities and bonds and have carefully selected fund choices, including some from active managers who can rapidly react to changing market conditions. They therefore proved relatively defensive across the board and fell less than the FTSE 100 in the month of February.

The 9th March has seen some substantial falls for stock markets around the world, with London’s FTSE 100 following Asian markets downwards with an 8% fall shortly after opening, before slightly recovering. The catalysts were the increasing spread of the coronavirus globally and a plunge in oil prices, with Brent Crude falling to $36 per barrel. This was following a breakdown in talks between OPEC lynchpin Saudi Arabia and non-OPEC Russia. Saudi Arabia slashed its oil prices over the weekend to try to force Russia to back sharp production cuts, which would ultimately increase the price of oil. This is a geopolitical issue and as such oil prices may remain volatile and they may further influence global stock markets.

It is impossible to gauge the full extent of the outbreak of the coronavirus and the degree of economic disruption which it may cause. The policy of containment, important from a medical perspective of course, is what is likely to have an economic effect. This could be through disruption to global supply chains or simply, more locally, due to days of work and production lost from those unlucky enough to be suffering from the virus or in quarantine. Travel, airline and leisure stocks have been hit hardest and the impact of the coronavirus proved the tipping point for troubled UK operator Flybe, which went bankrupt. The stock was not held in the portfolios of any of our fund selections. Indeed, careful analysis of the underlying stocks held by all of the equity funds included within our portfolios, both UK and international, has revealed there is less than 0.50% exposure to these sectors in each model portfolio overall. This means they were insulated from the sharp price declines seen by companies such as travel agents and cruise operators in the last month.

A robust response from central banks and governments could help to support stock markets. So far both the Chinese and Italian governments have pledged increased government spending to help support their economies and the Japanese central bank has stepped up purchases of domestic exchange-traded funds (equity tracker funds). It is unclear whether Wednesday’s UK Budget will bring any measures specific to the coronavirus to the table, but a “non-austerity” budget is widely anticipated.

The main thing which recent market turbulence underscores is the need to devise a long-term strategy and stick with it, preventing reactive moves which might prove costly for investors in the long term if subsequent market gains are missed out on. Analysis from Fidelity published in January 2019 looked at a hypothetical situation where $10,000 had been invested into an S&P 500 index fund between 1st January 1980 and 31st December 2018. Charges and taxes were ignored for simplicity. If the money was left fully invested over the entire time period, it would have been worth $708,143 at the end. Missing the five best days dropped the hypothetical overall return by 35% to $438,476. Missing the best 10 days would have more than halved returns to $341,484 and missing the best 30 days would give a theoretical return of only $135,226. This type of analysis is used to underscore the fact that getting market timing right is very difficult and that staying fully invested, even during volatile periods can ultimately lead to better returns as it can be difficult to predict when equity markets will pick up again and produce their best returns. It is important to remember that past performance is not necessarily a guide to future returns.

We are not complacent, and we will be monitoring medical, economic and market information closely and discussing the implications for our asset allocation and fund selections accordingly. Our overall strategy remains the same: to run model portfolios which are diversified across asset classes, industry sectors and countries to prevent concentration in particular areas. We also aim to offer some downside protection, through the inclusion of some exposure to fixed interest and/or multi-asset and an allocation to structured products within our portfolios.

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.

Date of publication: 9 March 2020

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