What on Earth is going on?!
If you’ve been watching or reading any news broadcasts in the last few weeks, you would have seen that global financial markets have been on a strong downward trend. There isn’t a market or sector around the world that hasn’t been impacted by the large scale sell-off.
While we are all aware that it is impossible to predict or control financial markets, its essential to be educated and informed as to what is causing this spike in volatility, and overall downturn in global markets.
In my opinion, it all points to a perfect storm. The main elements of this are as follows:
- Coronavirus – this global health event has caused markets all over the world to spiral. It has caused fear and panic as the extent of its impact remains unknown. It will likely have strong negative impact on the tourism, logistics & supply and manufacturing industries, which then tend to flow into other sectors also. As can be compared to the toilet paper crisis, the extent of the reaction by financial markets, in my view, is strongly overblown. I think that when the dust settles and we learn more about the spread of the virus, markets will realise they have over-reacted and will gradually correct. That said, we are only in the early stages of this virus, so the information and data that continues to come out may get worse before it gets better!
- Oil – While the Coronavirus was taking hold of the sectors mentioned above, the resources industry has also had their own shake-up, with the price of crude oil dropping more than 30% last night. This is a result of a potential price war between Saudi Arabia and Russia. Ironically, the dispute surrounds how much the major oil players should be cutting back their production in order to prop up prices. Saudi Arabia have the lowest cost of production of oil, and thus are looking to slash prices to attract a bigger market share for themselves, and steer production away from Russia, whose costs to produce are much higher.
- Strong 2019 – Global financial markets had a very strong 2019, with the US and Australia returning over 20% for the calendar year. That naturally requires some ‘levelling’ out, to make things long term sustainable, and there was always scope for 2020 to be a slower year in regards to return than that of 2019.
- Panic – Put simply, Markets are panicking. They are fearful of Coronavirus, and are panic selling to try and limit the exposure they have to the unknown. Panic is the great multiplier. The factors mentioned above (Coronavirus and oil) should lead to a 1+1 = 2 reaction, however, with panic on top, the markets are reacting in a 1+1 = 4 scenario.
So with the above in mind, and accepting our inability to control spread of Coronavirus or the oil price war, what can we do?
Being long term investors, we can purely only look at long term outcomes. There have been global health events in the past (SARS, Ebola, Zika etc. etc.), and there have been commodity price wars historically also. These are not new events in history. Panic selling off the back of these events, has also been seen before.
Markets recover. Some recoveries take longer than others, yet they recover nonetheless. There is no reason to believe this time will be any different.
However, we must note – for every person panic-selling, someone is thinking the opposite and buying exactly what they are selling. We often hear about billions being wiped off the share market in the media, but rarely ever hear when billions are wiped back on when markets recover.
The best we can do is buckle up, stay disciplined, stay educated and think of the long game. You can remain confident that you have an investment strategy that is built on fundamentals and academic research, equipped for the long haul.
I’ll be right here with you through it all. Please do not hesitate to contact me to discuss this, or any other concerns you may have.
The information provided in this post must only be considered general advice. It has been prepared without taking into account any persons individual objectives, financial situation or needs. Before acting on anything in the article, you should consider its appropriateness to you, having regard to your objectives, financial situation and overall needs.