Over the weekend and on Monday, the coronavirus led share market correction evolved to what can only be described as a crash. We have now seen share prices drop more than 20% in little over 2 weeks. The drop is all the more dramatic because the markets have risen steeply over the past 2 years, and was due a correction anyway.
The coronavirus continues to spread and while the numbers infected remain relatively low when compared to flu outbreaks, the uncertainty around the virus has resulted in widespread fear and panic. In Australia, we have seen panic buying result in shortages in toilet paper and hand sanitisers. The same fear is driving share market prices down.
Until we see some predictability around the corona virus, the volatility is likely to continue. China seems to have had some success in containing the virus, however the spread is accelerating around the rest of the world. There have been reports that the actual mortality rate is much lower than the official mortality rate. This is because many infections are mild and not reported. If this is true then it may help curb the fear of the virus however at the moment we just don’t know. Fear continues to cause panic selling in share markets, and panic buying of essential goods.
This week we expect governments around the world to release significant stimulus packages to counter the effect of the coronavirus. Multiple countries and private companies are working on a vaccine and although it is expected to take 12 to 18 months to roll out, the existence of a vaccine would do much to calm the fear. For now however, we are expecting continued volatility in the weeks and months ahead.
Oil price shock
In addition to the fear of coronavirus, we are now also dealing with an oil price war. Oil demand has been affected by reduced travel as a result of the coronavirus, and in the past when demand slows, oil-producing countries band together to cut production.
In 2016, Saudi Arabia and Russia formed an alliance after oil prices dropped and have cut production in an effort to support the oil price. Over the weekend Saudi Arabia wanted to cut production further however Russia refused because they felt it would give American oil producers too much of an advantage. Russia said that beginning next month, countries could produce as much oil as they wanted and the Saudis retaliated by saying they will increase their production and drive prices down.
For the consumer, lower oil prices are a good thing. If oil prices remain as they are, then we will likely see petrol prices below $1 per litre. This results in more money for consumers to spend or save. For oil-producing companies, the lower oil prices result in lower profit margins and some of the higher-cost producers will be forced to cut production. In Australia companies like BHP, Santos and Woodside petroleum are likely to see lower profits if the price war continues, and so their share prices have dropped significantly.
Implications for portfolios
In the 18 months prior to the coronavirus, we had reduced the risk of our model portfolios by reducing growth assets such as shares and increasing defensive assets such as bonds. This has helped to lessen the effect of the market crash and placed the portfolios in a position to be able to weather the coronavirus storm and be in a strong position to take advantage of lower prices when markets stabilise.
At the time of writing, from their peak the Australian market was down 24% and the US market down 19% which negatively impacts the portfolios. Positive impacts include a fall in the Australian dollar, and higher bond prices. For a balanced investor, these market movements have resulted in a fall of between 10 to 12% from the peak. Over a 12 month period, the drop is less than 1%. For more defensive portfolios the fall is lower and for more aggressive portfolios the fall is higher.
For clients drawing down pensions, we have positioned the portfolios to hold sufficient levels of cash and cash equivalent investments so that no assets are required to be sold in order to pay the pension for a year or more. This gives the portfolio time to weather the market shock and be in a strong position to recover when the markets recover.
Although we are prepared to see more market volatility over the coming months, we are confident that our client portfolios are positioned well to ride out the storm. When the fear around the coronavirus shows signs of stabilising, we will look for opportunities to buy growth assets at lower prices.
If you would like to discuss your portfolio with your adviser, please feel free to contact us on 03 9671 4550.
General Advice Disclaimer: The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the general advice contained in this report, an investor should assess their own circumstances or seek advice from a financial adviser. Where applicable, the investor should obtain and consider a copy of the prospectus or other disclosure material relevant to the financial product before making any investment decision to acquire a financial product. It is important to note that the price or value of financial products go up and down and past performance is not an indicator of future performance.