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Market Update

Friday 20th March 2020

We are sure you do not need to be told that the financial markets have suffered a major shock in the last month. Whilst they have not fallen as much as they did during the credit crunch, they have fallen much faster, giving us no time to react.

Why did this happen?

The shock has been bought about by the spread of Coronavirus. It was believed that China’s containment of the virus was working and that its impact on the rest of the world would be limited. Then, over the course of a weekend, the virus spread to many other countries and this prompted the World Health Organisation (WHO) to reclassify the virus as a pandemic.

Without a vaccine, governments around the world have tried to contain the virus. They have used measures such as promoting social distancing, social isolation and have even declared lockdowns in cities and certain regions – measures which are quite rightly for the good of the health of society’s most vulnerable people. However, it is causing businesses to slow down or shut altogether, impacting not only the local economy but also global supply chains. This is unlike anything we have witnessed before so markets have no historic reference point to base valuation calculations and models on which means calculations are being carried out on a worst-case scenario. These calculations are likely to over-estimate the long-term impact of this event and hence the rapid revaluation of risk assets.

What is the impact on your investments?

The falls experienced by your investments are much larger than one may normally expect, but then the FTSE 100 is down more than 30% in a month, which is not a normal event. It is the performance of the FTSE 100 which is quoted in the news when reporting on the financial markets. None of our clients’ portfolios have fallen anywhere near this figure as nobody is invested 100% in the FTSE 100. The diversified nature of the portfolios highlights that some assets have benefited from this environment (as an example US treasuries have risen in value) and some to be far less affected than the index. Because of this, we are confident there is no chance of your investment reaching nil value – you will not lose all of your money.

What is Rouse Limited doing?

We are in constant dialogue with the individual fund managers who have been very busy trading on your behalf. It is apparent that key positions have been exited early (ie Liontrust UK Smaller Companies fund sold Cineworld early in the month, before they closed their doors to patrons) and that many of them are sitting on elevated levels of cash. This cash obviously reduces the impact of further falls in valuations, provides liquidity to those investors who need to cash out, and maintains funds ready for deployment when the managers see opportunities.

We are keeping our eyes on the asset allocations of our model portfolios, the current asset mix has provided a buffer to equity market downturns and we expect it to continue to do so. We are aware that there is a larger than normal cash position within our equity funds and so are likely to hold back on increasing exposure to equities and other risk assets until this cash has been deployed.

What should you do?

We appreciate that, at this time, the news and your investment valuations make uncomfortable reading – that it feels that the worst is yet to come ie lockdowns, recession and job losses. But please remember that markets are forward pricing and have already priced in a bleak future (hopefully, as mentioned above, this has been over-estimated). Because of the forward pricing of markets, they will start to price in a brighter future far earlier than you or I would feel comfortable in doing so.

Our advice is to sit tight – do not let the short-term noise impact on your long term investment objectives.

It would certainly not be our advice to crystalise any funds unless it is absolutely necessary for you to do so.

Indeed, if you have money to invest, then undoubtedly the current market situation provides a much better entry point than it did before the Coronavirus outbreak. You could make a lump sum investment now or, if you prefer, phase an investment over a number of months so cheaper prices can be secured if the markets fall further.

Rest assured that things will get better and life and the markets will return to “normal”. In the meantime, we are available to guide you through this difficult period, so please do not hesitate to contact us with any queries or concerns that you may have.