Stock market falls: the bull run brought down by a virus

Well, what a week that was! Global stock markets - likened to ‘Teflon’ just seven days previously, due to their ability not to let any worries stick to them – finally succumbed to the Coronavirus.

The UK’s FTSE 100 index suffered its worst one-week fall since the global financial crisis in 2008, reaching 6,580 on Friday and wiping 13% (or £200 billion) off its value. The US’s S&P 500 also experienced its fastest fall since the Great Depression one hundred years ago.

Why markets are now worried

The worry for markets is that the global economy will be hit harder than expected.

Parts of China – where the vast majority of cases have been – has basically shut down in order to try to contain the virus. As a result, not only have manufacturing and services in China been hit but, as China is such a big contributor to the world economy, global supply chains and many businesses across multiple sectors have been impacted.

The other worry is that the virus has now spread to many other countries, where case numbers are rising. There are new ‘centres’ of the outbreak in Italy, Iran and South Korea and, if more are created and the virus really takes hold in another country, stock markets could fall further and the risk of a global recession would increase significantly.

But it is difficult to know if the market falls we saw this week are all we will see or if markets will fall further. This morning (Monday 2 March 2020) the FTSE 100 opened up 2%, but the situation is rapidly evolving.

What investors can do

In these situations, for most investors, history shows that doing nothing is best. Think about your long term goals and, if your portfolio is built to achieve them, leave it alone.

As we experienced in the early 2000s with the tech bubble, and in 2008/9 when the global financial crisis hit, stock markets can fall a lot, but they do recover.

If you are a monthly investor, it is times like this that your strategy really pays off – you benefit from pound cost averaging as your money buys more assets for less.

More adventurous investors may like to top up holdings. Think of this way: the stock market is some 10% cheaper than it was at the start of the year, so you are getting the same assets for less money. Many people like waiting for the January sales or Black Friday to bag a bargain and investing need be no different.

Those who are worried may like to make sure their portfolios are diversified and perhaps make sure they have a little money in gold, cash and/or US treasuries – the assets that tend to hold up better when stock markets fall.

However, as AXA Investment Management head of fixed income, Chris Iggo, said on Friday: “Insurance is always most expensive after the event and that seems particularly apt at the moment – bonds being a case in point. And that may be the thing to focus on. Bonds are now super expensive and equities much cheaper. The trailing dividend yield on the FTSE All-Share index is now 5.11%, almost 3 times the yield on the UK corporate bond index. In France, the equity yield is 3.44% compared to corporate bond yields of 0.36%.”

How the VT Chelsea Managed funds have fared

If you are invested in the VT Chelsea Managed Funds, please be assured that the research team is monitoring the situation closely.

The funds have been quite defensively positioned for a while and, following the outbreak of the Coronavirus, cash weightings were increased across the range as the team felt the markets outside of China were being overly complacent and there was a high degree of downside risk.

Equity weights in the VT Chelsea Managed Cautious Growth fund and the VT Chelsea Managed Monthly Income funds were below 40%, VT Chelsea Managed Balanced Growth fund was around 56%, and VT Chelsea Managed Aggressive Growth was around 90%.

Many of the alternative investment trusts (held in Cautious, Balanced and Income), also held up well as they have little exposure to the global economy. All funds in the VT Chelsea range also have exposure to either gold and/or silver.

Towards the end of last week the team started to add a little to equities to take advantage of the stock market falls. Funds and trusts investing in Japan, the US, UK and Europe were topped up, including Rathbone Global Opportunities, Fundsmith Equity , TB Evenlode Global Income, Fidelity US Index, JOHCM Global Opportunities, M&G Global Dividend and Man GLG UK Income.

The stock markets may still fall further but the team is happy with the funds’ positioning and ready to take advantage of any more potential opportunities.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.

Published on 02/03/2020