MARKETS – GENERAL
We have warned of the risks to markets for some time, not least on concerns that they were only pricing in good news. Of course, we could never have identified exactly what the cause of a change in sentiment and a market sell-off would prove to be, but our reasons for caution currently seem justified. The COVID-19 coronavirus represents the worst sort of black swan for markets as it is almost impossible to prepare for, and there is a total absence of any visibility on what happens next. Having initially expressed concern, many markets quickly dismissed the idea that it would become anything like a major global issue, and some rallied to new highs, led by the US. Events over the last week have indicated that we may be dealing with something much more substantial and the effects on the movement of people and supply chains, especially in Asia, look as if they could be very serious.
Now the virus has arrived in Europe it seems to have registered much more highly on investors’ radars and the long-term impact on economic growth could be significant. The big question of course is whether the disruption will be sufficient to reduce growth in China to close to zero and result in a global recession. If this happens, markets trading on rich valuations are extremely vulnerable to a significant sell-off and this is what is causing such concern as we write. The Federal Reserve and other central banks will almost inevitably provide support through policy easing if things worsen much further, but this deals with the demand side of the economic equation. What we are looking at here is largely a supply side shock to the global economy with slowing levels of activity rippling across the world.
Gauging how to react is incredibly difficult in such a situation. Is this an opportunity to sell before things deteriorate further and markets really start to panic, or hold fire while more certainty comes to the surface, or is it a buying opportunity given several days of heavy falls for risk assets? It feels too early for the latter other than, perhaps, for the most adventurous of investors, if indeed for anyone at all. It is important to appreciate that we are already light in our equity exposure relative to many peers and the blend of more defensive assets we hold is a vital component of portfolios. Treasuries and gold have both performed their expected roles over this difficult period. It may be that we reconsider some of our higher growth-oriented exposure – despite being cautious we do have significant holdings in Asia, for example, but we are still in evaluation mode at the present time. Rest assured that with discretion we can provide active management without you, the end client, having to be concerned about giving instructions.
We have warned of market complacency for some time and although we couldn’t have expected a virus coming out of China to be the catalyst for a sell-off in risk assets, that was never really our point. Being prepared and holding the right blend of assets given an uncertain environment was always our message, and remains so today.
Investment Line is written and edited by members of the Mattioli Woods Group investment committee and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.
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