The world has shifted dramatically over the past month. As COVID-19 spreads across the globe, medical experts are reminding us not to panic. But what those experts can’t know, is how people, businesses and governments will react, and how this will impact financial markets.
Countries are already in lockdown. Schools and businesses are being closed. Events are being cancelled and there are disruptions to normal day to day life. We can expect to see the number of people infected to grow over the coming weeks and months. The US, in particular, is a problem child in that they have not started wide testing of citizens due to a lack of test kits.
Here, Financial Spectrum’s Brenton Tong shares his views about the current economic conditions and what it means for your money.
What’s happening in the markets
As interest rates have continued to remain low over the past few years, many have turned to the stock market to earn more on their money. With so much volatility in the global markets, it’s understandable there are a lot of uncomfortable people out there. However, the impact of the virus will eventually pass and the world will get back on its feet. What we don’t know, is how long it will take.
Putting further pressure on the markets, Saudi Arabia has fallen out with the Russians and dumped oil on the market to punish them. Many people will be thinking this is great news – cheaper petrol for our cars and lower costs for airlines at a time when demand for travel is dramatically down. However, the impact is much deeper reaching than that. OPEC nations earning less revenue isn’t that much of an issue in itself. But there are a large number of commercial oil operators that will feel the pinch. Profits will fall, potentially leading to corporate failures. However, this will be very dependent on how low the oil price goes and how long it stays down for.
Businesses will need a strong balance sheet to weather the current economic conditions. There will be economic fallout and corporate collapse. British airline Flybe has just folded, with experts forecasting it will be the first of many in 2020. The virus will effectively euthanise companies already on the brink of collapse.
Retail is going to suffer significant short-term pain. Consumers are cutting back on spending and taking the opportunity to bolster their own balance sheets by saving and reducing debt. It will be interesting to see if consumers reset their spending expectations once this is over, or if they’ll fall back to old habits relatively quickly.
How governments are responding
Around the world, governments are rolling out stimulus packages that will help economies return to normal production levels faster. Central banks are dropping already low-interest rates even further to encourage borrowing and investment. There is an effort across the world to ensure that the impacts of the virus are as short-lived as possible.
This may lead to some longer-term imbalances that will need to be worked through in the future. But from an economic perspective, the fact that the current issues are resulting from a slowdown in trade and a drop in confidence, rather than a break down in economies, is positive. It also further supports the view that the global economy will return to normal over time.
Today, we’re seeing a Commonwealth Government spending package worth $10 billion to stimulate the economy. This is the first fiscal stimulus that we’ve seen in a very long time so it’s good to see the Government come to the party. When the virus is under control and normality resumes, it will be with more money floating through the economy.
What it means for your money
For most of our clients, the good news is that you have a diversified investment strategy and time on your side. While stocks have taken a bashing, buyers are still out on the weekends buying property, companies are still paying their rent on office buildings and the banks have got very strong balance sheets. The best advice generally, is to hang in there, ride the rollercoaster and make sure that you’re there for the rebound.
A number of clients have asked me if the current volatility represents a buying opportunity. In short, the answer is yes, volatility will breed opportunities. But those opportunities don’t come without risk. Only the game will be able to jump into the volatile markets at this stage. If you have a long-term investment horizon, a significant discount on stocks can be viewed as a good thing. Dividends based on last year’s payouts are looking very strong. Business staples will not be greatly affected by the current carve-out.
If you have particular concerns or questions about how the current volatility is affecting your money, feel free to contact us. It might even be a good opportunity to come in for a review meeting. We can do these over a video call if you’d prefer not to come into the office at the moment.