Dont Panic!

With world markets suffering their worst week since the 2008 financial crash with $3.6 trillion wiped off the value of companies, it’s easy for investors to panic. Particularly with all the sensationalist headlines floating about. 

It’s not hard however to understand why the markets are losing value and it should come as no surprise to investors or financial professionals. With China on virtual lockdown, this has  shut down the 2nd largest economy in the world. One that is a vital cog in the manufacture of many of the goods we buy. 

The effective halt of the Chinese manufacturing juggernaut has implications for countries far beyond its borders and quarantine zones. Whilst demand in these countries may remain high, as people go about their business, the ability to meet this demand is impacted as the Chinese factories where these goods are manufactured or provide the parts to the supply chain are closed or at reduced capacity. 

This is the reason the likes of Apple, Microsoft and Tesla have issued warnings that their earnings are likely to be impacted. This then has a knock-on effect on the share price, as these lower estimates are factored in. Not to mention the lower demand from Chinese consumers. 

In addition, Chinese tourists made 150million trips in 2018 spending $277billion according to the United Nations World Trade organisation. With the outbreak of the Coronavirus, some estimates are saying this could reduce by up to 70%. This has implications for a number of sectors from aviation, hotels, cruise ships, casinos, down to the tout on the street. This in turn impacts oil prices due to a decrease in demand, as there are fewer flights,  cruises etc, this then affects the supply chain and on it goes.

Due to China’s position in the world now, in terms of economic output,  in comparison to during the SARS outbreak in 2003, it is having and will have a greater impact on the world economies.

What I would say is, does this mean these companies have become bad companies overnight?

No. 

All we are seeing is a correction in the market to account for the lower earnings these companies are likely to experience and taking into consideration the potential for lower dividend payments and slower growth potential as the world gets back to business. 

What this means in my opinion, is that it represents a great buy opportunity for value investing. 

Investments should be considered as long-term and dips in the market should be expected.  It’s why I’m a firm believer in the ‘time in rather than timing approach’. If you look at past epidemics and the impact on global stock markets you will notice, hopefully, not the dips or recovery but the continued upward trajectory of the markets over time. 

Is it a time for Panic? No. We just need to hold our nerve.

I’m reminded of an old saying from an adviser I knew ‘You only really lose money if you crystallise your losses, until then it’s all make-believe!’

This is why financial advice plays a key role in the investment process, being able to bring clarity amongst all the noise. Helping clients remember why they invested in the first place and above all remain calm!