The coronavirus pandemic is placing significant pressures on financial markets across the globe and investors are understandably looking for information that will help them to determine the effects that this will have on their investment portfolios.
Since mid-February, the FTSE 100, which measures the performance levels of the largest UK-based companies, has fallen sharply. To put this into some context here, at the beginning of January, the FTSE 100 index was sitting at around 7,604 points but as the effects of COVID-19 began to materialise, the index saw a sharp drop of more than 25% at the end of March. This was both a faster fall than the one seen a decade ago during the last global financial crisis and significantly sharper than any other previous market shock.
Similarly, the blue-chip index experienced its largest fall for more than three decades in the quarter from January to March. In fact, the stock market hasn’t seen such a severe crash since Black Monday in 1987. As a result, many experts and forecasters are predicting that a global recession could now be an unavoidable consequence of the pressures COVID-19 is having on financial markets.
Regulatory responses to the COVID-19 pandemic
On 11 March, the Bank of England cut interest rates to 0.25% from 0.75%. Interest rates were then cut for a second time to 0.1% just over a week later. In theory, lower interest rates should have been the good news markets were looking for because companies could borrow money from banks at lower rates. As investors remained concerned over the levels of uncertainty the coronavirus was producing, the FTSE closed at a four-year low on the day this decision was announced.
Senior analyst for AJ Bell, Tom Selby, has however noted that ‘very few companies have escaped the falls, so this will have affected the vast majority of people who hold stock market investments via their pension or ISA.’ So, if you are an investor with some money in the stock market and have seen the value of your investment pot fall, you are certainly not alone.
To assuage any worries you might be experiencing, let’s take a closer look at why these losses aren’t necessarily something to be concerned about.
Market volatility and fund suspensions
As investors continue to weigh the effects of coronavirus against the measures that have been introduced to ease the impact it is having on the economy, markets are going to remain volatile. This means that it is difficult to say precisely how significantly this crisis will affect your investments over the short term. However, regulators are remaining both reactive and proactive to the changing landscape and intervening in different ways with the aim of protecting people’s investments and the economy.
When someone chooses to invest in a property fund, for example, a professional fund manager will aggregate the money and directly invest it into property and/or property shares. The pandemic has led to more than 10 UK property fund suspensions and, as a result, there is currently more than £22bn stuck in various funds. Although investors can, understandably, find it disconcerting to be stuck in these funds, all advice currently emphasises that they should not be overly concerned because the Financial Conduct Authority (FCA) has implemented rules that require fund managers to consider suspending operations when market conditions can be considered extreme.
Managers actively want to protect investors and ensure payments aren’t made when the value of the underlying assets cannot be accurately determined. Fund suspensions are, therefore, an effective way to prevent financial markets from becoming totally disorganised and investors who have found themselves in this position should sit tight and keep up to date with the latest updates from their fund provider.
Effective wealth management over the long term
The ways in which the market has reacted to the pandemic illustrate that the landscape isn’t all bad. As smart investors take a long term view of their investments, sharp drops shouldn’t pose an immediate cause for concern because the market will ebb and flow over time. The vice president of financial planning at Charles Schwab, Rob Williams, has noted that ‘recoveries can come in fits and starts.’ Although it can be tempting to consider cashing out your investments, even the stock-heavy portfolios that took the biggest hits during the last financial crisis only took a handful of years to recover.
Coronvirus will continue to affect markets but as volatility is normal, they are remarkably resilient and are often able to rebound quickly as soon as issues are resolved. Advice from experts suggests that investors should avoid looking too closely at the next handful of weeks or months and, instead, continue to focus on the next five years. Not only should you prevent yourself from unnecessarily adopting a fear-driven approach to your investments, but now is a prime opportunity to review the diversification of your portfolio and look for new opportunities to refine your strategy and maximise your returns.