Economic Update

Markets fall on oil price and coronavirus shocks

Markets fall on oil price and coronavirus shocks

What happened?

  • Global share markets have fallen in recent days driven by a collapsed oil deal and coronavirus impacts.
  • The Australian share market fell 19.6% from its peak on 20 February to 9 March 2020.
  • This means the gains of 2019 have been lost with the index back at December-18 levels.

Source: Bloomberg, IOOF

Why have share markets fallen this much? A case of two shocks

1. Coronavirus fears for global economic growth

Share markets have fallen following growing concerns over a global Covid-19 (a.k.a. coronavirus outbreak). This virus is related to the SARS outbreak that affected Asia, notably China in 2003. It has proven to be difficult to control and sparked outbreaks outside of China, across much of the world with Italy, Iran and South Korea the most notable cases.

As the outbreaks outside of China escalated, investors retreated from shares and fled to safe assets such as bonds as they priced in a weaker economic scenario with expectations of ongoing business struggles.

 

2. Oil price collapse

Over the previous weekend we saw a new economic shock appear. Oil producers were expected to agree to cut production to support oil prices. However, Russia chose not to participate with the deal failing. This triggered a response by major producer Saudi Arabia to cut prices and hint at increasing production. The threat of lower prices and increased supply saw oil prices fall with WTI Crude oil down 9.7% in one day.

These moves sparked fears of

    • Collapse in the US shale gas industry (which needs higher prices to remain profitable)
    • Economic weakness in oil producing countries, and
    • A greater likelihood of global recession in a very short space of time.

 

Staying the course

Client portfolios are set with risk in mind. They have gone through a detailed strategic asset allocation process to maximise the expected return subject to the ability to tolerate risk. This involves modelling different scenarios including times when the share market falls. Importantly it is expected to deliver, even after this week’s sell off, a long-term return that will meet financial objectives.

There are often reasons to sell out of shares. The chart below shows a few different reasons over the last 11 years. The important message to hold onto is that over time the market has recovered and allows you to earn strong long-term returns. Since the global financial crisis, even after the start to this year, investors have more than doubled their money. If you panicked and went to cash however, you would have only earned 36.5% over the last 11 years versus a potential 159.7% in Australian shares.

Source: Bloomberg, IOOF

 

Speak with your adviser

If you have any further questions, please reach out to your adviser.

Potential market weakness has been factored into the expectations that underpin client portfolios. Over the long term, being invested in line with the long-term strategic settings is the answer to achieving your objectives.

If you prefer a more active approach, we suggest speaking with your adviser on what additional options are available to you.

 

Source: IOOF

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