Investment Update – 9 March 2020
Stock markets have declined again, as Italy quarantined a quarter of its population to address its worsening coronavirus outbreak, and Saudi Arabia started a price war in the oil market; the Brent crude price has fallen from $65 per barrel at the start of 2020 to $35 at the time of writing. While cheaper energy should provide a boost for the world economy in due course, in the short term the sharp decrease in the oil price has destabilised markets; by noon on Monday 9 March, the share price of BP had fallen by 20% and that of Royal Dutch Shell by 14%. We regularly highlight the negligible allocation to oil stocks in our model funds, especially when discussing climate change matters; our managers focus on high-quality, resilient businesses and the variable returns from the oil industry tend to exclude them from consideration for our recommended funds. The combination of the news on the coronavirus outbreak and oil price decline means that the FTSE All-World index has now retraced the gains made since March 2019.
While the news on the virus outbreak seems to be worsening in Europe and the US, recent announcements in China and South Korea are more encouraging, with the number of new cases declining in both of these countries. Should this improvement continue, stock markets could eventually react in a manner which recognises the impact of the virus outbreak is transitory. However, long-term investors may have to tolerate heightened volatility, as short-term traders will surely continue seeking to profit from adverse developments. For instance, we are mindful that while the UK has universal healthcare and the British Government has adjusted sick pay rules to encourage self-isolation if necessary, the situation in the USA is materially different; this could present extra challenges in confronting the outbreak and the world media and financial markets are likely to react with extra vigour to bad news on the epidemic, should it arise in America.