During periods of high market volatility, as Aussies we are used to our market following the direction of US and European markets. It seems different this time with around the clock updates on Coronavirus, including infection data, rumours of vaccines, central bank and government policy announcements and President Trump's news conferences and tweets. Our market is not waiting for this lead and instead reacting immediately. We experienced this on Friday with the Australian market trading 8% lower before closing up over 4%.
As each new piece of information is released or updated we see markets reacting on that sentiment.
So what have we seen this week?
- Russia and Saudi Arabia engage in an untimely oil price war causing the price to fall significantly,
- As expected, the World Health Organisation officially deemed the coronavirus (COVID-19) outbreak a "global pandemic"
- The Italian Government has placed the country into lockdown
- President Trump invoked a temporary ban on travel from Europe into the United States with other countries following suit and even in extreme cases closing borders
- The market had been disappointed with the lack of detail on any meaningful US fiscal policy stimulus, however, on Friday they seemed to be making headway on a package
- The US declared a national emergency to help combat the virus
- The European and UK central banks cut interest rates, in line with other major countries
- The Australian Government responded with appropriately-sized fiscal stimulus
- An expectation that Reserve Bank of Australia will cut rates again next month with the potential to conduct a Quantitative Easing program shortly thereafter
- Conferences and sporting events have been cancelled, with bans put in place for large gatherings
As seen in the chart below the VIX (a measure of market volatility) spiked to 57.8. These are levels last seen in the GFC.
Until we see greater certainty around the spread and containment of COVID-19 we continue to expect volatility.
It is important to remember that the solution to an environment such as this never fails; it is the passage of time.
With the passage of time, and in this instance it could still be a matter of weeks, clarity inevitably improves, investors can quantify impacts and identify the winners and losers. Clarity does not have to immediately bring good news, it just needs to bring a bit of certainty and markets will stabilise/recover.
The economic and corporate profitability impacts will be real. However, we need to step back and assess how they could impact the long term value of investments.
We continue to monitor developments however, we still expect to tread carefully in entering markets, focusing on quality investments trading at prices below our valuation. We would rather miss part of any initial bounce in markets to make an informed investment decision than act pre-emptively, potentially risking clients' capital. We continue to be patient and selective.
Should you have any questions or concerns, please contact us to discuss. We are always available to answer your queries and provide you with the comfort that we are closely monitoring current events and markets so as to best manage your capital.