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“Sit tight and ride out uncertainty”: COVID-19 investment outlook revealed

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John Hockney, director at chartered financial planners Hockney Stevens, shares insights about the small business equity markets that may surprise you. 

With significant restrictions on the movement of individuals across Europe, along with massive government intervention to support affected industries and their employees over such a short period, feels more like months rather than weeks since we first warned our clients about the coronavirus threat.

Given all that is unfolding and the actions many of us are taking including working from home, self-isolating or practising ‘social distancing’, we feel that regular updates to clients during this crisis are important.

Where are we now?

With many countries including the UK, still learning about this epidemic and the pattern of spread, with all countries looking to ‘squash’ the peak pattern of any spread.

The result is that much of Europe and indeed the majority of the world is in some form of ‘shutdown’ (I do not like the word ‘lockdown’ as it implies something quite different!), with the UK appearing to adopt a science-led approach, which we can only hope will prove to be the prudent and practical approach to this crisis.

What has happened in markets recently?

With an almost coordinated western government intervention, action has been taken immediately to pump billions of Dollars, Euros and Sterling liquidity in markets to keep the economy moving.

I think it is worth mentioning again, we do not believe this is the systemic failure of the financial institutions which fuelled the 2008/09 financial crisis. Fundamentally this is a human crisis, which once controlled, will invariably see markets improve.

Nevertheless, the sell-off has been indiscriminate, no one sector has not been affected. Indeed, we understand from one fund manager that perhaps the ‘green shoots’ of a recovery are starting in China, as it would appear satellite imagery is showing signs that industrial pollution levels, almost non-existent for the last month or so, are beginning to rise again.

Portfolios

So much changes day by day, so it can be difficult to provide an accurate assessment of your individual investments. This week we have noticed a number of property funds that are imposing temporary suspensions, which is a prudent move to protect investors. However, more than ever now is the time to hold your nerve, sit tight and quite literally ‘self-isolate’ yourselves from worrying too much about investment markets.

Human cost

Whilst discussing markets and drawing comparisons, along with our thoughts, it would be remiss of us not to consider the human cost of this disease. We believe it is incumbent on us both as an organisation and individuals to ensure, during the period of rising infection, that we also exercise good practices to ensure the well-being of our clients.

Our policy

  • Now is the time to sit tight.
  • Equity markets invariably recover over time, our message is that as long as you do not need the funds invested, to ride out this uncertainty at least for the next few months, as markets are likely to settle down and recover somewhat.
  • In the short term, equity markets tend to be sentiment-driven, and with a lot of uncertainty around coronavirus, negative sentiment abounds, resulting in further declines.
  • We are all becoming aware, from constant news feeds, that COVID-19 is likely to be with us for a number of months and will invariably interfere with all our day to day lives.
  • No doubt there are likely to be further stock market movements both positive and negative as the full impact of this virus unravels.
  • Our overall assessment is that global economic growth will be impacted during 2020, which means company profits will be impacted and global equity markets are unlikely to recover to the start of 2020 highs.

Our message is to sit tight and ride out this uncertainty.

Bear market thoughts

Bear markets tend to exist during tough economic cycles. Although we may be heading at break-neck speed into a global recession, through the looming economic fallout as coronavirus starts to impact on everyday life, with what seems like ½ the population being told to stay at home or self-isolate.

But, are we really entering a period of sustained economic contraction, or just during the period whilst COVID-19 rapidly works its way around the world?

The good news is that a bear market is often followed by a market rally, and often have made sizeable gains in the months immediately following the downturn.

The past is no guarantee of future results, but historically even the worst markets have been temporary dips in a general march higher for stocks (see the table below which depicts bear market periods and subsequent returns). Of course, there was significant variability of outcomes around these averages.

Market timing is an almost impossible art, thus the use of phasing during a bear market tends to offer some degree of ‘insurance’ against a sustained bear market, before the inevitable market rally.

In this case, a sustained global reduction in the number of newly recorded cases of coronavirus may be the key to a return to equity markets improving.

Please note that the investment information in this article may not be suitable for all investors. Please seek advice from an independent financial adviser. Visit www.hockney-stevens.com to learn more.

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