Following another volatile week on the world’s main exchanges, it occurs to me that we shall probably remember March 2020 as a month in which one thing led to another.
Coronavirus fears spilled out of February and intensified, further gnawing away at already fragile investor sentiment. Then, just after America’s central bank cut interest rates by 0.5% a week ago, investors sought the safety of government bonds in growing numbers. That resulted in bond prices moving up and yields moving in the opposite direction, to ever more depressed levels.
At one point, just over a week ago, the yield on 10-year US government bond yields fell to a record low of just 0.3%. That was from a level of about 1.5% a month before1. So the move was rapid and sizeable.
If a government bond in the US – a country that has had a strong economy over the recent past – only needed to pay investors a fixed 0.3% per annum for locking away their money for 10 years, then fears about growth-fuelled inflation eating into future returns must have been very low indeed.
This move in bond yields provided fertile ground on top of which concerns about a breakup of the oil production deal struck between Saudi Arabia and Russia in 2017 could be sewn. Without confidence that the world’s big oil producing nations would continue to limit production, the price of oil found only one way to go.
The big theme in energy markets in recent years has been a newfound glut of oil and gas in America’s shale fields versus production cuts in the Middle East and Russia. Only with artificial interventions has oil been able to stay afloat.
This is one thesis. At times of heightened market volatility and uncertainty like this, the search for the real truth behind market moves proves irresistible. Have stock markets and oil simply fallen back because they were overvalued in the first place and needed to correct at some point? Or are markets providing a real vision of a depressed economic future we ought to take heed of?
What makes answering these questions more difficult is the fact prophecies can sometimes become self fulfilling. If enough people believe a sharp economic slowdown is coming, that is what may indeed come.
However, there are essentially a couple of good reasons to believe we have seen an overreaction to events. First – and we discussed this last week – there has been the fear that, after such a good year for stock markets in 2019, shares had to correct sometime.
Now a correction has happened, many markets and individual shares, while failing to attract buyers in sufficient numbers for the time being, look inexpensive. Valuations are undemanding, all the more so since government bond yields – with which the dividend yields on shares are often compared – have fallen so significantly.
Second is the omnipresent anxiety over the coronavirus. As we know only too well, behaviours, including the shopping habits of consumers across nations, have changed. There are many people genuinely fearful of contracting COVID-19.
In reality, much uncertainty still surrounds the future progress, likely severity and lifespan of the coronavirus, yet markets have already voted with their feet. That suggests upside to come once signs emerge the coronavirus has peaked and as businesses and consumers start to make up for lost time.
Recent stock market volatility has undoubtedly knocked confidence. However, with bond yields and short term interest rates so low – even lower after the Bank of England’s surprise cut to just 0.25% this week – shares now look to be the standout investment choice for the longer term.
While it might not seem to matter a great deal at the moment, a low oil price is yet another tailwind to growth, since it cuts fuel costs for businesses and consumers leaving both with more to spend on other things.
The economic stimulus announced by governments this week is also good news. Markets have so far focused on clouds – such as the lack of an interest rate cut for the eurozone, a temporary American travel ban for Europeans and low-speed response from a split US Congress to approve economic relief.
However, the European Central Bank’s decision to increase its asset buying programme and inject more money into the banking system on even more favourable terms, and a coordinated and immense cash injection into financial markets by America’s central bank are significant silver linings2.
New multi-billion-dollar government measures from the UK and Germany to Australia, and the likelihood the US government can eventually follow suit are, as yet, unrewarded interventions too.
Once the medical outlook and market confidence stabilises, there will be three new positives for investors to focus on – low energy costs, even lower interest rates and increased government spending.
Investors in multi-asset funds may well have seen a diluted response from their investments to recent events. A soaring gold price and rising bond prices will have helped offset the impact of lower stock markets. When stock markets rebound, the response may also be muted, as these other trends could reverse too. However, a smoother ride is the result.
The Fidelity Select 50 Balanced Fund is one such route to less volatile returns. Investing mostly in funds from across the investment industry that appear on Fidelity Select 50 list, this fund maintains an exposure to equities, bonds and cash whatever the weather. The amounts allocated to each are adjusted to account for where the best opportunities lie.
Investing regularly can help too. A regular savings plan will automatically buy more fund units or shares in months when markets are down and fewer when markets have risen. That leads to lower average buying prices over time. What better time to get off to a good start with a regular savings plan than after a market fall?
More on Opportunity in uncertain times
1 CNBC, 08.03.20
2 European Central Bank and Federal Reserve Bank of New York, 12.03.20
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
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