The Coronavirus or Covid-19 outbreak has impacted market sentiment, hitting equities particularly hard over the last few days. This comes after an extended strong run, and equity markets are characterised by short, sharp falls which are often followed by recovery periods.
As a result, we think over-trading around the current uncertainty is unlikely to be a winning strategy. Rather, looking through the noise to focus on long-term returns from a diversified portfolio that aligns with your risk profile remains, to our minds, the most appropriate approach.
We would caution against trying to over-trade around the Coronavirus uncertainty
Risk assets had a strong run over the last few years, helped significantly by monetary policy stimulus from Central Banks around the world, which was a boon for assets, and over the last twelve months has helped stabilise economic activity. Over the last few weeks, however, we have seen market sentiment hit in particular by concerns around the Covid-19 virus, which has pushed equity market valuations down and impacted some of the short-term economic expectations, potentially delaying the rebound in economic growth that was anticipated at the start of the year.
Equity markets, by their nature, are particularly sensitive to sentiment which leads them to be volatile, and often results in short, sharp falls as markets move quickly to discount new information, which is typically followed by a period of recovery.
Investors should not ignore authorities successfully bringing the infection under control
The chart below illustrates this, and puts the recent falls in context for UK and global equities. Whilst we don’t know what the future holds around Covid-19, we would caution against trying to over-trade around this uncertainty, as this is rarely a successful investment strategy. We are closely monitoring the situation, and whilst there are some signs that the spread of the virus is being brought under control at the current epicentre in Hubei province in China, outbreaks in other parts of the world are now to be expected, which is likely to add to volatility in the near-term.
Against this, investors should not ignore the flip side of authorities successfully bringing the infection under control, nor the potential to provide additional stimulus to support markets and kick-start economic recovery.
Our Chief Investment Officer, Chris Godding, discusses this in more detail in his monthly Pulse research piece.
Source: Lipper for Investment Management. ‘UK equities’ refers to the MSCI United Kingdom index, ‘Global equities’ refers to the MSCI World index. Data are reported in total return terms, gross of any fees and in Pounds Sterling. Data to 25/2/2020.
As long-term investors, we recognise that the return offered by investments is a form of compensation for uncertainty, and the best approach is usually to look through the noise and focus on long-term returns within a diversified portfolio. Our Multi Asset portfolios are well-diversified with a mix of assets that we believe are appropriate to different levels of risk, with lower risk portfolios having much less in equities and more in lower volatility asset classes, which are less susceptible to market sentiment.
Whilst we continue to monitor the on-going Covid-19 situation, we believe the most likely path is for economic activity to rebound, which would allow markets to return to form, albeit this is likely to come with a higher level of volatility than we have experienced recently and the timing of this is unclear.
As always, we believe the key to successful investing is to focus on long-term returns from a diversified mix of assets that aligns to your own risk tolerance.
This article does not constitute personal advice. If you are in doubt please contact one of our advisers. The value of an investment may go down as well as up, and you may get back less than you originally invested. Past performance is not an indication of future performance.
This article was previously published on Tilney prior to the launch of Evelyn Partners.