Recent moves in investment markets
As you will no doubt be aware the last couple of weeks has seen some dramatic declines in equity markets, accompanied by extreme volatility. The spread of the Coronavirus has caused both alarm and paralysis in several European countries, but Spain and Italy have been particularly badly hit, with both countries responding by restricting movement and consequently economic activity.
It appears to be only a matter of time before more draconian measures are introduced in both the UK and USA. As a result, it is highly likely that the world economy will slow sharply, and indeed move into recession. Against this backdrop it is easy to see why investors have taken fright.
The global central banks have woken up to extreme economic risks associated with this pandemic and are now starting to react accordingly. On Sunday the US Federal Reserve cut interest rates by 1%, effectively taking them to zero. At the same time, they announced a $700 billion stimulus programme. Subsequent measures in the US have pushed this figure above $1 trillion, and yesterday the UK announced support measures in the order of £330 billion. It seems likely that other central banks will follow suit to help underpin the global economy.
Making dramatic changes to investment portfolios in this type of environment is often unwise. Equity market valuations have fallen sharply, and the extraordinarily high levels of volatility that we have seen over the last week is often an indicator that negative sentiment is overdone. However, we are in uncharted territory and taking on more risk at this stage seems both premature and unnecessary in our view.
As we have seen from previous economic downturns, both sentiment and economic growth can recover much more quickly than expected. We are therefore sitting tight, albeit we accept that this is an uncomfortable period for investors.
If you have any further concerns or would like to discuss the portfolio in more detail, then please do not hesitate to contact us. We will provide a further update in our quarterly report.