Coronavirus Market Sell-Off
An unusual blog post for us, commenting on short-term market movements, but given the scale and level of media coverage (I’ve already spotted the first ‘Black Monday’ headline), we thought it may be worthwhile airing our thoughts.
Some of the headline figures are certainly interesting. Today (9th March) the FTSE 100 index opened over 8% down and may well record its worse day since the collapse of Lehman Brothers in 2008. The UK stock-market is not on its own, with European markets down by similar amounts, Japan ending the day 5.6% down and futures trading having been suspending on the US S&P 500 index, after losses hit a 5% limit.
This stock market drama follows the price of oil collapsing by almost 30% this morning, its worse fall since the start of the Gulf War in 1991. This was a result of a breakdown in talks between Russia and Saudi Arabia over cutting oil production, unexpectedly leading to an increase in Saudi production. At the time of writing shares in BP are down around 21% – quite a fall in a single day for such a large and valuable company.
Our view
If we take things back to first principles; any investment is valued based on its expected future cash flows. You buy a company share based on the profits you expect it to make moving forwards – its present value is the sum of discounted future earnings, attributable to shareholders.
The coronavirus outbreak is clearly going to damage the short term profits of a lot of companies, airlines and travel companies spring to mind. Many firms are reporting huge reductions in sales in China, one of the world’s largest markets– new car sales are expected to be down over 90% for the first 3 months of the year. If isolation measures that we have seen imposed in China and have now been announced in Italy, spread around the world, both production and consumption will nosedive.
But the value of investments, including shares, is based on all expected future cash flows. Will the coronavirus outbreak damage the expected future cash flows 3 years out? In 5 years? Over future decades? It would seem unlikely (but not impossible). It’s also worth noting that the pent-up demand for consumption (e.g. new cars in China) wont have entirely vanished – a good portion will likely be realised as and when normality is restored.
Bear in mind that due to the effects of compounding, the value of company share in, say 20 years’ time, is going to be far more dependent on the rate of return that company achieves on its deployed capital, than its current short-term valuation.
What will happen next?
If you are reading this to get our insights into where markets are heading, then I am afraid you are about to be disappointed. We don’t know and in reality, neither does anyone else. The difference is we know that we don’t know and we don’t try to pretend otherwise.
Bank of England Governor Mark Carney will no doubt be delighted to hear that I agree with him that the economic shock from coronavirus “could prove large” but that it will “ultimately be temporary”, but that doesn’t really mean anything for investing. As investors we want to know where, by how much and for how long any shock will occur and its impact for asset prices, so we could adjust our plans accordingly.
Trying to second guess this is a game of chance. It’s also worth remembering that there are two decisions to get right when playing this game. Not only do you need to time a sale – do markets have further to fall, if so by how much and when? – you also need to time when you buy back in. Markets can recover very quickly, without any announcement they’re about to do so.
What can be done?
One of Martin’s favourite sayings is “the time to worry about whether the keel is properly attached to the boat is in dry dock, before you set off, not when you’re in a storm in the middle of the Bay of Biscay”. You should have an investment plan based on your financial plan, informed by your own lifestyle goals, which is appropriate for your financial requirements and reflects your attitudes. If you are already a client of Collingbourne, this will be the case.
Don’t put yourself through the stress of worrying about financial markets and be extremely wary about trying to second guess any market movements. Trust your investment plan and its process and think very carefully before attempting fixes in the storm. Focus on what is important AND what you can control.
If you own a global, appropriately diversified portfolio – which again you will do if you are a client of Collingbourne – your investments will be linked to the productive capacity of the world. Markets reward investors for supplying their capital and funding ongoing human ingenuity and productivity over the long-term. The road maybe bumpy along the way but they’ve been here many times before.
Disclaimer:
This document should not be considered a recommendation to purchase or sell any particular investment. Care has been taken to ensure the accuracy of content, but no responsibility is accepted for any errors or omissions. We do not predict or guarantee the future performance of any individual security, investment, portfolio or asset class.
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