Our Research Team look at the factors that have driven recent share market volatility, and investigate the historical impacts of epidemics on investment markets.
To help you make sense of recent market conditions, please find below an excerpt from a recent paper produced by our specialist research team. We hope this information provides reassurance and insight into what’s driving the peaks and troughs in global markets.
The health of our clients is of utmost concern to us. In keeping with Government advice and to ensure we do our part to protect all clients from the risk of coronavirus, please make your adviser aware if you have been travelling overseas recently before your appointment.
Why have share markets fallen this much? A case of two shocks
1. Coronavirus fears for global economic growth
Share markets have fallen following growing concerns over a global Covid-19 (a.k.a. coronavirus) outbreak. This virus is related to the SARS outbreak that affected Asia, notably China in 2003. It has proven to be difficult to control and sparked outbreaks outside of China, across much of the world with Italy, Iran and South Korea the most notable cases.
As the outbreaks outside of China escalated, investors retreated from shares and fled to safe assets such as bonds as they priced in a weaker economic scenario with expectations of ongoing business struggles.
2. Oil price collapse
On March 5 we saw a new economic shock appear. Oil producers were expected to agree to cut production to support oil prices. However, Russia chose not to participate with the deal failing. This triggered a response by major producer Saudi Arabia to cut prices and hint at increasing production. The threat of lower prices and increased supply saw oil prices fall with West Texas intermediate (WTI) Crude oil down 9.7% in one day.
Staying the course
The graph below shows the historical impacts of various health events on the global markets. As you can see following each epidemic the market recovers and rewards those invested for the longer term.
Our client’s portfolios are set with risk in mind. They have gone through a detailed strategic asset allocation process to maximise the expected return subject to the ability to tolerate risk. This involves modelling different scenarios including times when the share market falls. Importantly it is expected to deliver, even after the recent sell off, a long-term return that will meet financial objectives.
Effective diversification is important in reducing risk in times of market downturn. The reason many portfolios hold a spread of asset classes, especially bonds and fixed interest, is to provide security during times like these.
Avoiding the noise, staying the course and focusing on long-term outcomes that match your overall risk and return objectives, is the best course of action in defusing short-term losses.
How has the Government responded?
The Federal Government released details on a proposed stimulus package in response to the economic impact of the Coronavirus pandemic. The stimulus package includes the following proposals:
The Government intends to introduce legislation to implement this package in the March sitting, which commences on Monday 23 March 2020.
Additionally, the Minister for Families and Social Services Senator the Hon Anne Ruston announced further reductions to the deeming rate, in response to ‘changing economic conditions.’ The lower deeming rate is to be reduced from 1% to 0.5% and the upper rate reduced from 3% to 2.5%. If you are a pensioner, you are likely to see the effect of these deeming rate changes from 1 May 2020.
We hope this information serves to reassure and provide some context around recent market activity.
As always, if you have any questions regarding your investment portfolio, please contact your adviser.