At times like this, it is imperative to keep a cool head and not to get swept away by hysteria. News over the weekend that Saudi Arabia will raise oil production resulted in a 30% drop in oil prices as markets opened on Monday. Combining this with the fallout from the coronavirus, means that since the start of the year equity markets are down between 10 and 20 per cent.
Although these two factors are hitting markets at the same time, they need to be considered separately.
Oil price war
The decision from Saudi Aramco (the world’s biggest oil producer) comes after failed negotiations between OPEC and Russia. Saudi Arabia wanted to cut production to maintain prices, while Russia wanted to maintain production at lower prices to support growth, thereby taking market share from US shale oil producers with higher break-even costs.
Saudi Arabia and Russia are in very different places to afford a price war, so ultimately, we think this is temporary but it could last several months.
This move has further shocked markets already grappling with the coronavirus. US shale producers tend to be heavily indebted, raising the spectre of stresses in credit markets. It is also bad news for UK markets that are heavily laden with energy companies. The recent shift away from UK equities in our strategic asset allocation  is already serving us well.
At the margin, this is good news for the global economy as it should have a stimulative effect on growth. The impact will be felt most positively in emerging markets that are large oil importers and have growing energy demand. Albeit the global sensitivity to the price of oil is lower than in the past given the greater use of renewable energy.
The number of reported cases globally is now over 100,000. The vast majority of cases continue to be in China, but there is a worrying acceleration in the number of cases being reported further afield with the virus now having reached 100 countries.
Outside China, governments have mostly emphasised good hygiene. However in the last few days we have seen Italy place restrictions on the entire population, while Germany, France and a number of other countries are restricting public gatherings and encouraging social distancing. All countries are encouraging individuals that feel unwell to self-quarantine.
The increasing restrictions have direct consequences for economic activity and this is the biggest cause of markets weakness. As such, we expect some form of monetary and fiscal response. In the US we have already seen a special $8.3 billion fiscal package targeting healthcare spending to contain the virus. Fiscal packages will be delivered elsewhere but for the time being, what we have seen is small relative to the economic cost of restrictions.
The Federal Reserve has also slashed interest rates and we think other central banks, especially in emerging markets, will provide further monetary accommodation.
Expect more fiscal stimulus going forward.
As we have discussed over the last several months, we had been reducing risk and focusing on higher quality companies for the best part of 12 months anyhow. Our view, driven by the trade war between the US and China, was that we faced a risk of economic slowdown. The trade truce reached in January changed that view but was quickly surpassed by the coronavirus threat.
We remain neutral across asset classes and regions and have used market weakness to reallocate within markets, focusing on more defensive sectors such as consumer staples and healthcare.
Why financial planning is important in these times
The coronavirus impact on the markets may have you thinking, ‘how does this affect my financial plan?’ There are some key points to bear in mind:
- Perhaps the most important thing you can do is avoid panicking. Stick to the plan – remember to focus on your long-term goals and avoid reacting to short-term volatility. Please check-in with your adviser if you’re concerned.
- Holding a diversified portfolio that gives you exposure to shares, bonds, property and cash can help reduce the impact of market volatility as falls in one part of your portfolio may be cushioned by positive performance in another.
- We see falling markets as an opportunity to pick-up some high-quality investments at attractive prices.
As always, we will keep you up to date with developments.
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