Is now the time to back financials?
Investing in financials has long divided opinion. Traditional financial stocks – such as banks...
This week, share prices around the world have endured some of their worst one-day falls since the days of the 2008/2009 global financial crisis.
On Monday 9 March 2020, the US stock market (as measured by the S&P 500) fell by 8%*. On the same day, the UK’s FTSE 100 dropped 7.7%*.
Most millennials won’t remember the last market crash, now more than a decade ago. And, if they do, their knowledge probably comes from it being a subject in the class room, as most were aged 12 to 27 and unlikely to be investing at the time.
‘The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions.’ — Seth Klarman, President of Baupost Group, one of the largest hedge funds
Coronavirus concerns continue to spill over into financial markets. As the number of cases of COVID-19 continues to surge around the world, there are concerns about how COVID-19 will impact consumer demand, manufacturing and major global economies.
Enter, the oil industry.
Oil prices had their largest single-day drop since 1991** on Monday too. We can thank Russia and Saudi Arabia – two of the world’s biggest oil producers – for this drop, as both were in a standoff about what to do with their oil supply since the coronavirus was leading to a drop in demand. Saudi Arabia and the rest of OPEC couldn’t convince Russia to cut production, despite decreased demand. Saudi Arabia got the hump and slashed its prices. This move launched a price war against Russia.
At times of uncertainty like this, investors sometimes turn to “safe” investments like cash. However, as Darius McDermott, FundCalibre’s managing director, pointed out: “Share prices could fall further, but losses are not losses until you crystallise them.”
This is often referred to as a ‘paper loss’, meaning you only have a capital loss when you sell your investments. If left alone, share prices could recover and you could instead have a capital gain in the future.
Darius continued, “Possibly the worst thing anyone could do right now, would be to redeem investments. History tells us that holding your nerve can be the better strategy.”
Worried about risk? Consider these five lower-risk investments
Gold is typically used as a cushion during volatile markets. Merian Gold & Silver fund provides an easy and effective way to add gold to your portfolio. It invests in both physical gold and silver, as well as gold and silver mining companies. We interviewed manager Ned Naylor-Leyland on the practicalities of investing in gold on the Investing on the go podcast.
Fixed income is another popular area when investors are turned off by equity market movements. Managed by Chris Bowie, the TwentyFour Absolute Return Credit fund aims to achieve a positive absolute return in any market environment. The fund is easy to understand and has risk control at the heart of its process. The fund is unconstrained by geography and will look across the UK, US and Europe for the best ideas.
Lazard Global Equity Franchise can invest in any business around the world. However, because the managers are looking for industry leaders, there is a natural bias towards larger-sized companies. The fund is unlikely to be invested in banks, financials or real estate, as customers can switch easily and margins are low. It is also unlikely to hold commodity companies due to the lack of forecast-able earnings, or big pharmaceuticals as the patent expiry cliff is opaque.
This unique environment fund also invests in global equities. However, due to its environmental mandate, the fund avoids entire sectors meaning it will, at times, perform very differently to the global stock market. And, unlike its peers, this fund goes beyond climate change and addresses a full range of global environmental challenges – problems that aren’t going away despite the focus on COVID-19 and oil prices.
Lastly, if you’re thinking about staying close to home, AXA Framlington UK Mid Cap is an option. Manager Chris St John uses thematic long-term ideas to construct the portfolio of dynamic growth companies. He invests primarily in the companies in the FTSE 250 and focuses on medium-sized companies. For comparison, the FTSE 250 only dropped 6.4% on Monday compared to FTSE 100 fall of 7.7%*.
The UN Conference on Trade and Development has warned that the COVID-19 economic “shock” could end up costing the world $1trn (£760bn)^ of lost income. They also said the virus “will cause a recession in some countries and depress global annual growth this year to below 2.5% – the recessionary threshold for the world economy”.^
It’s clear that COVID-19 has everyone, including investors, on high alert. But try not to make any major, sudden changes to your portfolio. The severity of COVID-19 and its long-term economic impacts are yet to be seen, especially when compounded by oil pricing wars. Although it’s impossible to predict what may happen next, the good news is: if you’re investing for the long-term, you can probably afford to wait to it out.
Just as I was reassuring you six weeks ago about political uncertainty in the UK and the US, it’s important to remember: the stock market has always picked itself back up after every major fall in history.
Concerned about a possible recession? Read our millennials guide to recession and what it means for your money
*Source: FE Analytics, total returns in sterling, 6 March 2020 to 9 March 2020
**Source: Bloomberg, 9 March 2020
^Source: Sky News, 9 March 2020