Investment Market Update

As coronavirus continues to spread, the new week has bought with it another reason for investors to be unsettled; a falling oil price.

What is happening to the oil price?

The impact of coronavirus has lead to a fall in demand for oil, causing an oversupply problem. As a result, the Organisation of the Petroleum Exporting Countries (OPEC) proposed to reduce oil output in a bid to prop up the oil prices. This decision was welcomed by the majority of non-OPEC countries apart from Russia who refused to cut back its oil production. Saudi Arabia’s answer to Russia not playing ball was to swamp the market with oil, leading the oil price to nosedive.

It is difficult to imagine that just a couple of months ago the oil priced had increased to $70 per barrel due to conflict in the Middle East. It is now around $35/barrel.

A lower oil price makes new oil production unattractive and therefore the lack of new investment is likely to bring the oil supply and demand back into balance. Whilst this can take some time, it is apparent that neither of the countries are able to tolerate such low prices for a prolonged period. We are therefore hopeful that the oil price will return to equilibrium sooner than rather later.

Why have the investment markets fallen so sharply?

The interrupted supply chains, restricted travel and ban on mass-attended events such as festivals coupled with a falling oil price are having an economic impact globally. Investment markets find declining investor sentiment and uncertainty unsettling and right now, the future of the oil price and the spreading of Covid-19 is fuelling both.

Investors are right to be concerned about the ability of some of the companies to finance themselves should their profits fall substantially for an extended period of time. This is why we recommend to our clients that they invest in investment managers who meet with companies, analyse their balance sheets and pick businesses that are in a strong financial position to withstand these unusual events.

It is also important to remember that the real extent of the falling stock markets are distorted and amplified by the heavily automated, computer-driven models and funds that are automatically selling investments to re-balance the portfolios.

What are the policy makers doing?

This morning (11 March) the Bank of England (BofE)cut its interest rates to 0.25% and introduced a new Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises. The BofE emphasised that they are committed to help UK businesses and households to bridge across the economic disruption that is likely to be associated with Covid-19. They are hopeful that these measures will support to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.

Last week we saw Hong Kong and Thailand both give cash lump sums to its citizens. Whilst we do not believe all governments will hand over money to its citizens, they can introduce short term solutions such as making banks more lenient on unpaid interests or reducing VAT or business tax for a limited amount of time. 

As these are global events, no policymaker will want to be viewed as not doing anything. We therefore remain positive that the governments and other policy makers will “do the right thing”. 

Shall I sell my investments?

It is normal to be concerned about your investments given the amount of negative press there is out there. When markets are volatile, it is often tempting to sell investments in an attempt to reduce further losses. That being said, it is almost impossible to time these market fluctuations correctly and consistently.

Whilst having investments during a volatile stock market can be an uncomfortable experience, falling stock markets do create buying opportunities for many investors as the strong growth days most often come after the weak ones. This means that making significant changes to the portfolio following short term volatility could cause investors to lose out on the potential upside. 

We feel it is important for us to remind our clients of the importance of having a well-diversified portfolio along with a sensible long-term financial planning strategy.

How we can help?

We would be pleased to help with further advice in this area. If you would like to discuss any of these matters further or you need advice, please contact Andrew Tricker, LFWM director on 0207 490 7766 or email andrewtricker@lfwm.co.uk.

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