• Trustees Private Wealth

Mar 3, 2020

Investment Insights: Coronavirus

On 31 December 2019 the World Health Organisation announced the outbreak of coronavirus (Covid-19) in Wuhan, China. Initially, there was a relatively calm reaction from global share markets. The Chinese stock market fell 12% in January, but other share markets continued their march higher, in line with their strong performance during 2019, believing the virus and its economic effects to be largely localised to China.

This calm reaction continued into mid-February, even as the virus spread beyond China. Companies and sectors that were likely to be specifically affected by the spread of the virus – tourism, airlines, airports and ports – were sold off, but markets as a whole continued to rise.

On 18 February the calm gave way to an extreme volatility, as the news reported that the number of new cases of coronavirus outside of China exceeded the number of cases within China. For the remainder of February global markets were heavily sold off, with the US market experiencing the quickest correction (fall of more than 10% from a peak) in history. At February month-end, global markets were down 12% from their recent highs.

The New Zealand share market has fallen almost 10% from its high point in mid-February, with Air New Zealand, Sky City, and Port of Tauranga among the hardest hit. On Friday 28 February, New Zealand confirmed its first case of coronavirus.

These are concerning times for investors and there is a significant temptation to react. Before you do we recommend the following:

  1. Keep the recent fall in perspective: The market reaction to coronavirus over the past 10 days has been historic in terms of speed, with the US market recording the fastest 10% decline from the peak in its history. That being said, falls of 10% or more are relatively commonplace in stock markets. In fact, on average stock markets decline by 10%-15% from peak to trough in any given year. 

    Additionally, while markets have fallen significantly, they have only fallen back to where they were in October 2019, just five months ago. If we look at the last 10 years we can see the recent decline in a more appropriate perspective. Volatility and short-term negative returns are part of the experience when investing in shares and are the major reason why investors are compensated with attractive returns over the long term.

  2. Don’t try and time markets: The last major share market sell-off took place in the final quarter of 2018. Share markets were down almost 20% and many commentators were predicting a recession and further share market falls. Instead, markets quickly recovered and 2019 delivered stellar returns for investors who had remained invested. The 2018 decline highlighted the notorious difficulty of trying to time markets. No one can successfully predict what the share market will do over the coming days or weeks or months. Selling shares when markets are going down, often leads to investors missing the market recovery.
  3. Review your investment strategy and your risk exposure: The strong run in share markets over the past decade, and the relatively meagre returns available from cash and bonds due to low interest rates, may have led investors to take on more investment risk than is appropriate for their situation. Your exposure to the stock market should be consistent with your investment objectives and your risk tolerance.

Overall for those investors in the accumulation phase you should continue to contribute to your portfolio; the shares you are buying are approximately 10% cheaper than they were two weeks ago. Investors who are withdrawing from their portfolios are likely in more conservative portfolios with a meaningful exposure to fixed interest, so their portfolios haven’t fallen as far as the wider equity market.  While it is impossible to say how long these negative returns will last or how much further markets will fall, the best course of action is having a plan that suits your circumstances and sticking to it.

A disclosure statement is available on request and free of charge.

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