Cast your mind back to the financial press of December 2019. How many economists had “a virus caused by people eating bat soup” in their forecasts for 2020? And yet here we are watching with concern the spread of the new Coronavirus, with it being unsettling as a health risk as well as from an investment perspective.
Part of Align Financial’s investment approach is the belief that share markets are designed to handle uncertainty and that prices incorporate new information in real-time as it becomes available. We see this happening when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to us all, but they are also a subtle demonstration that the market is functioning as we would expect.
Share market declines can occur when investors are forced to reassess expectations for the future, especially future potential earnings and growth. The rapid expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. In mid-February Apple announced that it expected revenue to take a hit from problems making and selling products in China. Last week the Prime Minister said the virus will likely become a global pandemic, and airlines are preparing for the toll it will take on travel. These are just a few examples of how the impact of the Coronavirus is being assessed.
Share prices respond to new information as it becomes known. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which can push prices lower. Our investing approach is based on the principle that if you take sensible investment risk, you will get higher-than-cash future returns as a reward for holding risky assets.
I can’t tell you when things will turn or by how much, but my expectation is that when the new normal occurs, company share prices will return to fair levels. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century. I wish I could tell you that I have a reliable way to identify a market peak or bottom, but I don’t. No one does.
We help our clients develop long-term investment plans they can stick with in a variety of conditions. In doing this, we consider a wide range of possible outcomes, both good and bad, when helping you establish an asset allocation and plan. Those preparations include the possibility (even the inevitability) of a downturn. Amid the anxiety that accompanies developments surrounding the Coronavirus, decades of academic research and long-term investing principles remain our best guide.
In such an environment, ensuring that your portfolio is diversified is your best defense to navigate this volatile market.
What is causing share prices to fall?
It’s hard to say exactly, but likely factors are the extended closure of Chinese industry, disrupted supply chains, declines in key commodity prices, bans on Chinese travel and the flow-on effect to confidence.
How far will prices fall?
I honestly have no idea. It is fairly common for prices to fall 10-20% every 5-10 years.
Should we be selling our Australian and Global shares?
No. If prices fall by more than 20% we will re-evaluate this.
Should we be buying more shares?
Perhaps. Some brokers are advising investors to ‘buy as much as they can while companies are on sale’.
Why are interest rates falling?
To help stimulate economic growth.
As always, if you have any questions, please get in touch.
What Can Align Financial Do For You? Visit our homepage to learn more about our service. If you would like to speak to us about your financial circumstance, please feel free to give us a call on 02 9913 9995. We are located in Narrabeen on the Northern Beaches of Sydney.
Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online