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Covid-19 – Market contagion?

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Market Update (Please note this column was prepared on 17 March, 2020)

In the last few weeks global sharemarkets have substantially retraced their early momentum for the month of January and the latter stages of last year.

In the early period of the Covid-19 outbreak, financial markets seemed to blissfully ignore the progression of the virus. However, we are now in a period of daily market volatility as investors gauge the flow-on economic impacts and whether the recent sell-off presents buying opportunities.

The catalyst for the sell-off has been two-fold.

Firstly, the progression of the virus outside of China and secondly, a steady stream of companies beginning to downgrade forecast earnings.

The initial outbreak of the virus in China caused a major disruption to international supply chains, although the situation in that country seems to be improving.

Perhaps the biggest factor in market performance over the next three to six months will be the as yet unknown impact on company earnings.

It is possible we will see a rally if the spread of the virus can be contained, followed by dips as the market reacts to further earnings downgrades.

All of this uncertainly begs the question: “How should we react?”

With further rate cuts being implemented by Central Banks to try and curb the impact of Covid-19, low interest rates will be the norm for the immediate future.

Turbulent markets always make us feel like we should “do” something. Sometimes (like the 2008 financial crisis), we should. However, often sitting back and monitoring the situation is the best option. We think that is the case now.

Since 2008 there have been 19 sell-offs greater than five percent. The current downturn is now classified as a bear market, having retraced more than 20 percent from its peak (at the time of writing, the sharemarket was down 21 percent.

Every sell-off is serious – from Greece teetering on the brink of complete collapse, to the US Government sovereign downgrade in 2011.

However, since December 2008, the US sharemarket has risen well over 200 percent, excluding dividends. In other words, reacting to a crisis by selling shares is often a poor decision.

The extent of market contagion relative to the level of viral contagion is determined by a combination of investor sentiment and factual information. An objective evaluation of your investment goals will ensure that your portfolio is well-positioned to weather any potential storm.

As has been the theme in recent years, low interest rates continue to limit options for investors.

With further rate cuts being implemented by Central Banks to try and curb the impact of Covid-19, low interest rates will be the norm for the immediate future. Whether you are an existing investor or considering an investment in the capital markets for the first time, get in touch with Forsyth Barr.

Source: Forsyth Barr Focus, Special Report, February 2020.

This column is general in nature and is not personalised investment advice. This column has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. Disclosure Statements for Forsyth Barr Authorised Financial Advisers are available on request and free of charge.

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About Author

Brett Bell-Booth

Investment Advisor with Forsyth Barr Limited in Tauranga. Phone: (07) 577 5725 or email brett.bell-booth@forsythbarr.co.nz

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