What has been happening?

Markets have already been volatile in the last few weeks as worries about the impact of Coronavirus grow. We consider the Coronavirus as an exogenous shock to the economy and are nervous about its full impact.

We think early evidence suggests it will be harder for many companies to hit their current plans, creating an environment where profit warnings are more likely.

Following the worst day for markets since the financial crisis governments across the developed world have stepped in with a major wave of fiscal stimulus.

This is likely to prove the most effective action taken to combat the economic impacts of Coronavirus.

Whilst the action from central banks has been supportive it is a clumsy approach to targeting the need to keep vulnerable businesses and households in business in the event of the short-term cashflow problems the virus is likely to cause.

Of all the steps taken the government of Italy has been the most audacious in proposing a mortgage holiday.

This is likely to be a highly effective measure, albeit it one with far-reaching consequences for the Italian banking system. It has long needed consolidation and it is yet unclear how smaller Popolari banks can survive the impact of this step without direct government aid.

Should the government offer this support it may well demand the price of consolidation for it. (This does remove a long sore within the European banking system).

In the United States President Trump is muting a cut to payroll tax. It is as of yet unclear whether this will apply to both employers and employees. Although it should be noted that the effectiveness of such a move is debatable.

After all, when companies in crisis receive cash, they tend to use it to pay their suppliers and avoid bankruptcy whilst still laying off staff. And as far as individuals go a payroll tax isn’t much good if companies are laying off staff. The process of US fiscal stimulus is rarely smooth. However, it does establish the principle that governments are going to do whatever it takes to avoid this economically disruptive event becoming economically destructive.

During these nail biting steps we await the UK budget later today to see what action our government will take, which has so far been more modest in its approach. Also, we should note two other pieces of news today.

Firstly, there is mounting evidence that both China and South Korea have passed the worst of the virus, with remarkably few new cases emerging from China. This is evidence that this virus will pass.

The Bank of England has already taken an immediate action to ensure UK growth doesn’t slow down as a result from the Coronavirus. There has been an emergency cut in interest rates and the base rate has now been cut by 0.5% to 0.25%, the lowest in history to help stimulate the economy.

Saudi Aramco has upped its oil production. This is confirmation of an all-out war for control of the oil market. Ultimately, we believe that contrary to Donald Trump’s assertions this is likely to be a net negative for the global economy.

It creates significant risks for segments of the market, particularly US oil extractors, which are highly indebted. We will watch closely how this affects the corporate bond market for evidence of contagion.

What are we doing about this

Before the exogenous shock of the Coronavirus, investor anxiety had been unwinding and management behaviour was implying the worst effects of the trade war were behind us.

However, we now no longer feel confident this prior inflation in investors’ views adequately reflect the secondary threats from a new risk to growth

It is important to note that the aim of diversifying your portfolio reduces the risk of losses when markets do sell off. We have carefully designed and implemented our portfolio structure to dampen the risks and generate capital on the upside and protect gains on the downside.

The spread of the Coronavirus has caused investor jitters across the global financial markets. In addition to this, the recent slump in oil prices has added to the widespread volatility.

We believe that it is key to distinguish between short-term ‘noise’ and long-term trends, whilst maintaining the flexibility of both to safeguard returns and seek opportunities, which takes the utmost importance during challenging market times like this.

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