Coronavirus: Comment from our Wealth Management team
Over the course of the last week, global investment markets continue to show extreme volatility with big swings in values during the relevant day of trading and ultimately, large losses seen at market close.
Add to these market moves, the fact that individuals are naturally worried about their own health and that of their loved ones, concerns over the practical implications of looking after younger children who require adult supervision, and the logistical problems associated with carrying on work, these are indeed, worrying times.
Ultimately, we are unable to predict the outcome of the Coronavirus, the length of time that draconian measures are in place, or the long-term effects on the investment markets.
We do know that there is already considerable support internationally from both Central Banks and Governments, with the likelihood of further assistance in the coming days and weeks. Whilst there will be a feeling that Governments can do more in each jurisdiction, the fact that that support is being shown on an international basis, does provide some belief that there will ultimately be a time when we ‘come out the other side’.
In an effort to try and keep this communication on a slightly more positive note, it is encouraging to see China reporting no new domestic cases of Coronavirus on Wednesday of this week and a pickup in business activity as people return from work having been in lockdown since the end of January. Perhaps there is an ‘other side’. However, even this slightly brighter note was followed with news that China is seeing an increase in cases from people returning from abroad.
Whilst taking all this on board, it is worth remembering that sharp investment losses have been seen before. In fact, they have been seen regularly through modern history and have often been just as severe, if not more so than the current falls.
The chart below highlights the last 95 years on the FTSE All-Share Return Index, and shows that on 10 previous occasions the market has fallen by 20% or more, with five of those drops being greater in percentage terms than the current rate of fall in this crisis.
The chart is for illustrative purpose only; it does not constitute investment advice and must not be relied on as such. The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a guide to future returns. Transaction costs, taxes and inflation reduce real investment returns. The portfolios are hypothetical and are re-balanced annual on the 1st January. All investment income is assumed to be reinvested, unless state otherwise. No transaction costs are included. Bull markets start from the lowest close reached after the market has fallen 20% or more, to the next market high. Bear markets start from when the index closes at least 20% down from the previous high close, through the lowest close reached after it has fallen 20% or more.
This chart reminds us that it remains sensible for a financial plan to include the retention of cash-based investments that can be used to cover emergencies and planned expenditure over a three to five-year time period.
Ride out volatility
Holding this level of cash will give investors the opportunity to ride out periods of negative investment returns, aiming to avoid the scenario where investments are cashed in at a point in time when markets are in distress.
Similarly, where investors have more than five years to go until they reach the point they wish to use / spend their money, they should be comforted to some degree by history, and that a recovery in the markets will be seen at some point.
Of course, it is easy to list historical statements and infer that everything will be ok. The reality is that we cannot guarantee history will be repeated and individuals are rightly worried. Should you wish to discuss your concerns with MHA Carpenter Box Wealth Management, you should seek to contact your adviser.
Additionally, we have put together a Coronavirus resource section on our website, which can be found using the following link: https://www.carpenterbox.com/coronavirus
This includes information that will assist business, providing information on Government Support such as the Emergency Business Grant, Small Business Grant and Coronavirus Business Interruption Loan Scheme (CIBLS), along with practical help for dealing with HMRC under the Time to Pay regime.
Lastly, with ever lower interest rates for cash accounts, which will be exacerbated by the Bank of England announcing further interest rate cuts this week, we have seen an increase in interest in our Treasury Management Services. The service aims to spread money across several cash accounts from different banks offering the potential for higher rates of interest than can be found on the high street, whilst maintaining the protection on offer by the Financial Services Compensation Scheme (FSCS).