Coronavirus – A Briefing Note

Although we touched on the Coronavirus in our recent investment update since then, the volatility of world stock markets has been hitting the headlines. We therefore thought you might appreciate some reassurance about the long-term prospects for client portfolios.

What’s been happening?

Markets have been slow to respond to the potential for Coronavirus to develop into a global pandemic. As contagion has spread beyond China, however, we have seen a sudden sell-off across global markets to the point where many individual stocks – especially in the US market – are heading towards correction territory (-10%).

There are a number of reasons for the severity of the sell-off:

Although indications are that the number of deaths from Coronavirus is only a fraction of that for seasonal flu’, there is no known protection or cure at present. Markets hate uncertainty and that includes a previously unknown and unpredictable pandemic. The race for a vaccine is on.
In recent years, China has become the world’s factory for the component parts that other companies rely on to build their own products – everything from chips in smartphones to engine parts for cars. So when China closes its manufacturing plants, it creates a supply chain gap for other global businesses.
People businesses – such as casinos, hotel chains, shopping centres and airlines are suffering as people avoid travel and shy away from crowded places and the risk of contagion.
Some stocks – particularly in overcrowded growth sectors like IT – were already looking very expensive and due for a correction.

It’s not all bad news.

As is often the case where stock markets decline sharply, there has been a ‘flight to safety’ – meaning that people are buying government bonds and gold. This is good news for KMD’s diverse portfolios that already have exposure to these investments. Stock markets can never be a one-way bet, and so maintaining a diversity of exposure to different types of asset has always been our preferred way to mitigate the downside risks of a hit to one portfolio element.

Another important attribute for long-term investment success is patience and the art of knowing when it’s best just to do nothing. As Warren Buffet, one of the world’s most successful investors said this week: “investors should not buy or sell businesses based on the day’s headlines”. It’s important to remember that there are real businesses behind these falling stocks and they have not closed their doors forever. They may experience a temporary trading set-back but, if the world needed their products and services before Coronavirus, they will need them again when it’s over and normality returns.

What people often forget is that volatility is normal for stock markets and the best way to ride out the peaks and troughs is to avoid attempts at market timing – a sure way to lose money in brokerage fees. As the chart below shows, over the longer term, stock markets bounce back from epidemics. The war time advice of ‘keep calm and carry on’ has never seemed more appropriate. The worst thing to do is to ‘panic sell’ which only results in crystallised losses and the dilemma of when to buy back in.

When investors return to the markets (as they inevitably will) they will probably be more discerning and realistic about prices – perhaps signalling a revival in the value investment strategy.

A rebalancing exercise

As you are aware, our Investment Committee meets on a quarterly basis to discuss the medium- to long-term investment strategy and to review the performance of the underlying funds selected for our portfolios. At the last meeting, some minor adjustments to portfolios were recommended and agreed, and you will be receiving a separate communication from us about this. We would like to stress that our rebalancing decisions are taken as part of our long-term, cautious approach to investment and never as an attempt to time markets.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

Dean Aitchison
BSc (Hons), IMC, MCSI, MIMA
Chartered Wealth Manager
Investment Manager

www.kmdpwm.co.uk

February 2020

LONDON – CAMBRIDGE – STANSTED – SAFFRON WALDEN

KMD Private Wealth Management Ltd
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KMD Private Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. FCA no. 803600. Registered Office: 8 High Street, Brentwood, Essex CM14 4AB. Registered in England no. 11059008.