Coronavirus: Market risk and Market Declines

The coronavirus, or COVID-19, continues to dominate news headlines around the world.

What started in one Chinese city has spread throughout the world, creating a global crisis.  

The global markets have suffered due to the coronavirus. Some of the worlds biggest markets recently recorded record lows not seen since the financial crisis in 2008.

Chris Wicks, the managing director for Holborn Assets and chartered financial planner, talks about the current market situation.

The situation

The world is watching with concern the spread of the new coronavirus.

Across the globe there is uncertainty. It is unsettling on a human level as well as from the perspective of market risk.

At Holborn, it is a fundamental principle that markets are designed to handle uncertainty, processing information in real-time as it becomes available.

We see this happening when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to any investor. Still, they are also a demonstration that the market is functioning as we would expect.

Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy.

The global markets have taken a hit due to the coronavirus

The global markets have taken a hit due to the coronavirus

 

Apple announced earlier this month that it expected revenue to take a hit from problems making and selling products in China.

Australia’s prime minister has said the virus will likely become a global pandemic, and other officials there warned of a severe blow to the country’s economy. Airlines are preparing for the toll it will take on travel.

These are just a few examples of how the impact of the coronavirus is being assessed.

 

What this means for investors

The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As market risks increase during a time of heightened uncertainty, so do the returns investors demand for bearing those risks. This pushes prices lower.

Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.

We can’t tell you when things will turn or by how much. Still, our expectation is that bearing today’s market risk will be compensated with positive expected returns.

That’s been a lesson of past health crises. Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009, all increased market risk.

Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.

 

Summary

We fully understand that the current market risk is a worry for our clients. By selling now, clients will crystallise the temporary reduction in their investments into actual losses. They are also likely to miss the up-turn when it comes, which will only add to their woes.

Our recommendation is that unless their goals have changed, they should remain invested. This is the best position to be in for them to benefit from the market recovery when it comes.

I hope that you find this helpful. If you feel that your circumstances have changed and you need to access your funds sooner than anticipated, please contact your usual financial adviser, or myself.

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