Falling oil prices drag down shares
Investment Update: Falling oil prices drag down shares
A drop in oil prices sent international shares tumbling when stock markets opened this morning.
Concerns about the impact of the coronavirus on global economic growth have weighed on demand for oil. Over the weekend, talks took place between the Organization of the Petroleum Exporting Countries (OPEC) and other producers about cutting output to support oil prices, but they failed to come to an agreement. In response, Saudi Arabia, OPEC’s de facto leader, said it would raise production and lower prices in an effort to preserve its market share and win over new customers from rivals.
When the commodity markets opened on Sunday evening, oil prices plunged. Investors reacted on Monday morning by moving money out of riskier assets such as shares and into what are traditionally considered ‘safe haven’ assets like government bonds which fluctuate less in price during periods of turbulence. The FTSE 100 opened 8% lower, but recovered some of those losses in early trading.
The coronavirus outbreak has rattled markets. In China, where it originated, the authorities appear to have contained the virus, but it continues to spread internationally with new cases reported in most countries around the world. Italy has been hit particularly hard, with much of the northern part of the country now under lockdown.
Central banks have taken steps to limit the impact of the virus on the global economy. At its meeting last week, the Federal Reserve, the US central bank, cut interest rates by 0.5%. The Bank of England looks set to follow suit at its next meeting on 26 March, if not before, and the Chancellor of the Exchequer is expected to include various measures to help businesses when he announces the budget on Wednesday. Meanwhile, the International Monetary Fund has pledged US$50 billion to support developing countries struggling with the virus.
While the current turbulence may cause you some concern, try to avoid any knee jerk reactions. It’s important to remember to look on your portfolio as a long-term investment, with most portfolios designed to deliver returns over a period of at least five years. Although coronavirus may hinder the markets in the short term, we do not expect the effects to be long lasting.
Diversification, the spread of investments across different asset classes and regions, can also help. While bond holdings may not completely offset the losses caused by shares, they should offer a degree of protection as the market fluctuates.
If you have any questions about the impact of the coronavirus on your portfolio, please don’t hesitate to contact us.
This update reflects our view at the time of writing and is subject to change.
The document is for informational purposes only and is not investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.
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Watch Rohit Vaswani's market on the Omnis Website (Transcrypt below) So we've woken up to the news about tariffs. President Trump announced that a baseline 10% tariff would be introduced on all imports from the 5th of April, and that a series of higher reciprocal rates on specific countries will take effect on the 9th. This includes 34% tariffs on all imports from China, 20% on imports from the EU, 24% from Japan and 10% here in the UK. In essence, for the US, the effective tariff rate on imports will jump to 24% if President Trump follows through with the plan. And this is assuming that 25% tariffs are included on all imports from Canada and Mexico, which were not mentioned yesterday. Now, this increase in tariff rates is likely to increase inflation in the US. It could be quite impactful, but in reality, we could expect consumers to substitute towards products that were produced domestically or to products that were produced by or imported from lower tariffs countries. Retailers could also absorb absorb some of the cost as the profit margins are currently higher than they were a decade ago. We think these mitigating factors help to reduce the impact of tariff increases in inflation, but these tariffs are inflationary nonetheless. Nonetheless, personal consumption expenditure could also come down, especially with a drop in consumer confidence and the decline in stock prices that we are seeing. At the same time, the US economy will be impacted if businesses respond by reducing investment and if other countries retaliate forcefully, which would weigh on US exports. Both of these scenarios are look quite likely right now. Thinking about the other side of the cone, it is feasible that the revenues raised by the tariffs might then fund tax cuts in the US, and it is also reasonable to expect that the US central bank may cut interest rates further than previously expected, which would limit the damage done to the US economy. That said, this deadline of the 9th of April for kind reciprocal tariffs leaves the door open to backtracking and further delay. So this is very much a watching brief. Now let's be honest, the tariff announcements yesterday were much bigger than most investors expected and markets have reacted negative. It's currently just before 7 o'clock in the morning in the UK and Asian markets have moved sharply down and all signs point to European, UK and U.S. markets falling today too. In these kind of environments, investors move to what we call safe haven assets and we have seen bonds should typically seen as a safe haven asset hold up well since the announcement. What does this mean for you as investors? Well firstly, remember the diversification. You will have a portfolio that has both equities and bonds in in it and whilst you can expect your portfolios to drop in value in the very short term, the bonds in your portfolios will cushion some of the blow. Secondly, remember that reacting to market events is never a good idea. It usually means you experience the losses, the losses, but do not benefit from any recovery we may see. If we think back to five years ago, 2020 during COVID, some of the best days in the year happened right after some of the worst days. And just by missing those 10 best days in the markets, you could impact your long term returns. That leads me to the need for composure in these environments. Maintaining composure is super important. If your circumstances haven't changed, you should not react to this week's news and your financial advisor can help you understand what these market moves mean for your specific portfolio and your long term investment objectives. And lastly, patience. Markets will always go through turbulent times in the short term, but in the long term markets always recover. So think about and focus on your long term goals and not on the short term market impact over the next.
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