February Market Update

Chris Brown, CIO, 28th February 2020

Here is a quick end of month market update. As you may know, this week equity markets have fallen sharply on fears of the negative impact of the Corona Virus on the global economy. To put this in perspective, as we write the UK FTSE All-Share index is -13.7% year-to-date and international equities (measured by the FTSE All-World index) are -8.2% in sterling terms (in part cushioned by a fall in the pound). Having started the year positively, all these losses have come in the last 6 days.

In our 2020 outlook video (which can be watched here) we mentioned that as long as the virus growth was accelerating, markets would remain weak. However, once the growth rate stabilised then we thought markets would likely recover their losses over the next 3-6 months. We are no epidemiologists (and even if we were there would be the problem of obtaining accurate information from places like Iran, North Korea or China) and so can take no view on how long or how bad the outbreak will be. However, this does look to us to be a temporary economic shock. This means that it is likely that, one way or another, by the summer we will be through the worst of it. If this is the case then this is more of an opportunity to add investments at lower prices rather than a longer term threat to your portfolio’s returns.

We therefore added to your equity positions as markets sold-off this afternoon and we took some profits on your bond portfolios where appropriate. For sure there will be disruption to global supply changes and industries such as energy, airlines and hotels will see sharp drops in their profitability. However, in previous outbreaks (including SARs in 2003 and Swine flu in 2009) these disruptions proved temporary and profits and market prices quickly returned to their old levels. We hope that this will be the case again. One reason for acting fast is we think that markets have become more volatile with the rise of electronic, computer driven trading levels. These either follow trends (up or down) or adjust their positioning based on market risk levels. Typically, both strategies have the effect of buying on the way up and then selling as markets fall and volatility rises. This can cause markets to overshoot in both directions and provides opportunities at market extremes.

Will this prove to be one such market extreme? Of course, only time will tell. If this does prove to be a temporary shock then we feel good that adding investments at today’s lower levels will prove the right thing to do. However, there is a risk that today’s disruption feeds through into the credit markets. We might see defaults and credit problems in the most affected industries (including energy, airlines or tourism). Rising credit costs and inability to get finance could then seep into the broader economy and trigger a larger slowdown. This is the risk we are watching for. Any central bank rate cuts or announcements broader support for the economy (as we have seen in the past) will help reduce this risk but it cannot be ruled out today. We therefore remain, as ever, vigilant of credit markets and are ready to change our positioning accordingly. If this happens we will of course update you again.

The final point to note is that the vast majority of our portfolios (bar those that have equity only mandates) follow a multi-asset approach. The diversification and risk management approach we use has continued to work and so portfolio losses year to date are below the equity markets numbers we quote above. Our fixed income portfolios remain up for the year and are doing their job in lowering overall portfolio risk levels and helping cushioning market shocks like these. Finally, should you want more information on how your portfolio is performing or to talk any of these issues through in more detail with us please feel free – as ever – to call or e-mail us with your questions.