A New Hope

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19/03/2020
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Many people are quite rightly concerned about the spread of coronavirus (COVID-19). Unfortunately, this can induce panic and lead to irrational behaviour, such as the sudden urge to buy all the toilet paper in the local supermarket. However, it can also lead to irrational behaviour in global markets.

Of course, the recent price drops in equity markets across the globe are justified if this pandemic continues for a significant period and we enter a global recession. I, like many, have avoided looking at my portfolio to see the significant percentage drop in value over the last month.

I know in plenty of our previous correspondence we mention that it is time in the market as opposed to trying to time the market. That still rings true even today. When talking about an investment or market we are always required to state that past performance is no indication of future performance. This is true, past events do not influence how the markets will behave in the future. Nevertheless, after any significant drop in the markets they have usually gone on and reached new highs.

At this point there might be some readers who are confused by the title of this piece – a new hope! The reason we are hopeful is because we are seeing unprecedented global action taken by governments and countries to stem the spread of coronavirus. There has been a worldwide mobilisation against a common enemy, the coronavirus. There have been no rising tensions in the middle east between Iran and the United States. The Brexit war of words has stopped between the UK and Europe and even Donald Trump’s trade war seems to have been put on the back burner for now. Significant funding is being deployed into healthcare facilities around the world. International cooperation to ensure the free flow of trade and food is continuing. A global effort to find a vaccine to this virus is ongoing. It has managed to unite the world in a way that no human could. That is, if you can look beyond the skirmishes for toilet paper in the supermarket.

Every cloud has a silver lining, and seeing the world react in this way does give hope. Before  coronavirus raised its head, the main concern was how we tackle climate change. Many people quite rightly felt frustrated at the lack of action by countries and governments to tackle this head on. What coronavirus has illustrated though is that the world can act when it needs to. It should be reassuring to see the measures being taken. Some measures might seem slightly nationalistic rather than collaborationist. However, leaders want to be seen they are doing the right thing for their own people, after all they do want to get re-elected.

So, despite the market turmoil and drop in portfolio values it has given us a renewed sense of hope. We can act when we need to. Climate change is still the biggest long-term threat to humans. Collectively we have been slow to act and reduce global emissions; coronavirus might aid the global fight against climate change.

It can even be argued that coronavirus has reduced global CO2 emissions with everyone around the world going into lockdown. With everyone working from home coupled with cancelled flights and reduced travelling there will be a huge reduction in the amount of CO2 being released into the atmosphere and a potential improvement to the air quality in the major cities. Coronavirus could set positive behavioural trends long after it has dissipated.

We are hopeful markets will also recover. The government are announcing a huge fiscal stimulus to ensure that companies and jobs are protected. If we remember back to the financial crisis, the drop was as severe as we are experiencing at the moment, however, it was over a longer period. This is remarkable considering in 2008 we were looking at the imminent collapse of the financial system as we knew it. It could have all come tumbling down were it not for a multi-billion bailout of the banks.

Below is a chart that dates to the start of 2008 up to the 16 March 2020. On a price comparison basis, the recent drop is on the same scale as the banking crisis which we find remarkable.

Is this the market equivalent to irrational toilet paper hording?

Nevertheless, what it does illustrate is that in the aftermath of the largest seismic shock to hit financial markets the FTSE 100 and FTSE All-Share went on an unprecedented rally, climbing 70% (price comparison basis). On a total return basis (dividends reinvested) over the same time period but up to the end of 2019 the FTSE 100 climbed 99% and the FTSE All-Share climbed 86%. Of course, past performance is no indication of future performance.

With coordination between the central banks in cutting interest rates and a raft of quantitative easing (QE) being introduced we remain hopeful that the markets will do the same again.

 

Source: FTSE International Limited ("FTSE") © FTSE 2020. "FTSE ®" is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Past performance is not indicative of future performance.

The value of an investment with Rowan Dartington may fall as well as rise.  You may get back less than the amount invested.

The information contained does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective investment. Opinions provided are subject to change in the future as they may be influenced by changes in regulation or market conditions. Where the opinions of third parties are offered, these may not necessarily reflect those of Rowan Dartington.

Rowan Dartington is part of the St. James's Place Wealth Management Group. Rowan Dartington & Co Ltd is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales No. 2752304 at St. James's Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom.