Some frequently asked questions about the current investment situation
In this ever changing situation we are receiving e-mails from all the fund managers and investment companies on an hourly basis. I wanted to share this from Aberdeen Standard with you, because I thought it was helpful, to the point and mirrors exactly the kind of conversations we are having (on the phone) right now!
1. What is happening in the market?
In past days, equity markets had suffered their steepest falls since 2008 – prompting comparisons with the global financial crisis: the event that defined the past 12 years. The similarities should not be overstated. The 2008 crisis was intrinsic to the financial system itself, not a response to an external threat. For all its potential impact, the coronavirus outbreak is a much more conventional crisis. Thus far, the financial system has done what it is designed to do: allow investors to react decisively to a changing economic environment. However, volatility seems likely to continue. As I type the markets have risen remarkably, who knows where they will be tomorrow!
2. Why have my investments fallen by so much?
Investors hate uncertainty. This rapidly changing situation is one of the most uncertain situation investors have ever faced. As a result, some investors have panicked and sold anything they deem to be too risky. This has included equities and in many cases bonds issued by companies. The money generated has been invested in assets such as government bonds, which are often popular during times of uncertainty due to the comparatively reliable income they provide.
3. What is the likely impact on global economic growth?
We expect global growth to fall well below its current trend in the first three quarters of the year. A number of countries are likely to enter technical recessions (i.e. two consecutive quarters of negative growth). We expect full-year global growth to be just 1.7% in 2020, making it the third-weakest year for the global economy since 1980. Since then, only 1982 and 2009 have been worse. But if the spread of the virus slows in the second quarter of the year, we expect a strong rebound in growth from the fourth quarter onwards. Our projections are for a growth rate of 3.9% in 2021. This will be achieved with the help of the significant support from governments and central banks that has already been announced or is widely expected.
4. Could the crisis cause a more severe recession?
Although the downturn is likely to be similar to a typical recession in many respects, it may be sufficiently brief to avoid significant debt defaults and job-shedding by companies. The uncertainty remains very high, however, and a deeper and more persistent recession is certainly possible.
5. What are you going to do to manage/recover my investments?
In any prolonged downturn, tactical asset allocation and astute security selection are crucial. Certain asset classes, sectors and companies look particularly vulnerable to the effects of the virus outbreak, whether because of high debt levels, exposure to travel and tourism, or disruption to their supply chains. But not all markets, sectors and companies are equally exposed to those factors. Active asset managers are able to concentrate on areas that are least exposed and on companies that have robust finances and business models that are still sustainable in testing times. It is also worth noting that in these times of market panic, some investments are being sold indiscriminately.
In other words, the good has been punished along with the bad. This could create opportunities. In terms of equities, one obvious opportunity could be the chance to invest in high-quality and resilient companies that have been caught up in indiscriminate selling. Some companies may be largely unaffected by the outbreak; others may make market-share gains at the expense of competitors who are worse affected by the outbreak.
6. Is now the time to withdraw investments?
Given the recent and very sharp falls in markets, we don’t think that there is likely to be much benefit for investors in selling investments now. The correction has been the most marked since 2008 and may well have already factored in much of the economic damage that the coronavirus outbreak will do. So investors who sell out now risk crystallising losses rather than avoiding further falls.
7. Is now the time to add to my investments?
Although tactical flexibility is crucial, it’s important not to get sucked into attempting to ‘time the market’. Calling the bottom of a bear market is notoriously difficult. There is a famous investment saying that "It is time in the market, not timing the market" that matters. Spreading investment across both time and assets is what's important. However, especially in times of such uncertainty, it is always important to consult with your adviser before making any investment decisions.
If you can think of any more questions, or you just want to talk through your own personal situation, we are here!