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The Italian Job

Just like the hair pin bends and breath-taking stunts in a car chase – global stock markets have had us on the edge of our seats.

If you are able to just turn off the show and go read a book – I would highly recommend it!

Previous Brexit gloom headlines have blended seamlessly into Coronavirus Armageddon, panic abounds and can someone tell me why we all suddenly need so many toilet rolls?

This has been another absolutely awful week for stock markets, as Equity and Bond funds alike have fallen in sync with an irrational and emotional crash. The FTSE 100 is down by over 19% in a month, whilst our client portfolios are down between 7-14% in a very orderly fashion based on risk strategies from 1-5 (at Weds 11th March).

The FTSE 100 is down by around 13% since last Friday and it endured its worst historical day yesterday since the famous Black Monday crash of 1987.  You are forgiven if you are feeling a bit concerned!

Let’s start with what this is NOT.

This is NOT a banking crisis such as we experienced in the Great Financial Crisis of 2007/08.  Banks are apparently well capitalised and the extra stimulus agreed now by the Bank of England, European Central Bank and US Federal Reserve – really should ensure this remains the case.

This is also NOT the worst crash of all time.  The big previous crashes of 1929, 1987 and 2008 can give this current ‘crash’ a lesson in how far to fall.  They also offer us massive clues as to what happens next AFTER the crashes…..but those great times are not quite here yet in my view.

This market crash is about two things. Firstly, a mysterious virus that came out of China and secondly a fight about oil production. Let me update you on both as I did on Monday.

Oil Tantrums:

Last weekend, Russia refused to reduce its Oil production in order to keep prices up. The Saudi’s retaliated by increasing their own production. This will hurt Russia and markets because Oil and Energy companies make up a large chunk of them.

Our humble guess (after speaking with the fund houses) is that Russia will be forced to accept lowering their production and that this argument will be resolved in the coming months – releasing some of the downward pressure on markets.


China, South Korea and Iran are now reporting that they have passed the peak in new Coronavirus outbreaks. People appear to be returning to work and it would seem that this is a 4-8 week ‘event’ that then shows recovery.

Italy is the real issue now. The scenes in hospitals and supermarkets have sent a collective chill down the spine of the rest of the western world.   Everyone is quite rightly thinking ‘this could be us’ and so the panic has spread before the virus.

Markets hate uncertainty. They can cope with bad news – they just need to know what is happening. Speaking with one of my key contacts at Rathbones this morning, his greatest frustration is that investors cannot yet ‘model’ the real effect of this virus on the global economy.

This is where I see Italy as being crucial. If they are able to report a peak in the coming weeks and offer more data on recovery rates and times etc. I genuinely believe that the markets will start to calm down as the damage is quantified.

A vaccine is some way off at this stage. However, the spring is not! We know that the sun does have a positive effect in slowing down the spread of a virus. We also know that the more people who catch the virus and recover – the greater the ‘wall of immunity’ we build up as a population over time.

Where’s the bottom?

On Tuesday, I wrote that the recovery on that day was just another bear market rally (false dawn). Sadly, I was correct. This was because we did not have enough data to truly understand the economic impact of the virus on global markets.

We still do not have that data and so I expect that today’s recovery is sadly only a brief respite before we endure a few more hairpin bends.

However, I am convinced of two things:

  • History shows us time and time again that the greatest market performances come after a Bear Market Crash. My 2008 clients experienced their greatest gains over the recovery years that followed.
  • History also shows us that you can NOT time the markets. It is virtually impossible to get back in to a market at the right time. This is because exactly the same irrational behaviour that makes it shoot up, is the very same behaviour that made it so cheap in the first place!

It is critical to remember that we all still hold exactly the same amount of units in the funds we invested into. We haven’t ‘lost’ any money until we actually take it out. You wouldn’t sell your house if it suddenly went down in value, the same logic applies here.

Everyone’s portfolio is taking a hammering right now. We are comfortable with the fact that the higher risk portfolios have fallen more than the lower risk. It would seem obvious that this would happen, but in an era when Bonds start behaving like equities – nothing is guaranteed. To this end, it is a case of ‘so far so good’ from an analytical point of view.

Now is a great time to be invested if you have a long view – of this I am 100% certain.

I will keep updating you as we travel through the bends, drops and finally climbs.  My hunch is that this will continue to fall for a while – but that recovery will be swift and exhilarating when it comes.

Stay well and let us know if we can do anything at all to help you during these times.




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