Market fluctuations often occur and short-term uncertainty is common. Over the long term, investment portfolios that are sensibly put together seek to deliver on long-term objectives.
Our Research Team has prepared a note to explain what is happening and what has been causing the market turmoil. This team will be keeping a close eye on events and will continue to update us regularly.
- Global share markets have fallen in the last week as well as the Australian share market.
- Investors are worried about weakness in the global economy because of more coronavirus cases outside of China, and a collapsed oil price deal
- This saw investors continue selling their shares because they are concerned about the short-term impact on businesses from these threats.
Why did these events affect share prices?
There have been more new cases being reported outside of China. This includes developed countries such as the US, Europe and Australia. To stop the virus spreading some governments have had to implement severe bans on travel. For example,
- President Trump banned travel from Europe this week to stop cases from countries like Italy bringing it to the US.
- In Italy, the government has shut down travel within the country until early April because of how many cases they are seeing.
Restricting travel means people make less contact with each other. This gives less opportunities for the virus to spread and hopefully reduces the total number of people infected. However, it also hurts businesses because it makes it harder for people to buy or use their goods or services. This is not only bad for businesses but also their workers. In this case we are talking about a weaker economy which will see lower profits and dividends for companies. The fear of this has contributed to investors selling out of shares in recent times.
Oil prices are based on a mix of how much has been produced vs how much is needed for cars, industry, energy etc. This week there was a potential deal that would have seen global production cut to support oil prices and help countries dependent on high oil prices to fund government spending. However, Russia did not agree to this deal for several reasons.
In response Saudi Arabia increased its supply of oil and cut prices. Saudi Arabia is a big producer and by doing this oil prices fell over 20% this week. This hurts oil producing countries that need higher prices and also hurts Australian producers like Woodside or refiners like Caltex. Since the world economy is weaker because of coronavirus, another hit to it from this shock gave investors additional reasons to sell their shares.
Staying the course
Portfolios are set up with risks like share prices falling in mind. They are set up with other investments like cash or bonds to help reduce the impact of this risk. This is at the core of diversification and we take into consideration how portfolios will function depending on the market environment. In periods like the last week investments in cash and bonds will have continued to hold their value or increase even as share prices fall. Over the long term however, being invested is crucial. Cash is not a viable long-run alternative with the cash rate at 0.25%.
You will have worked with your adviser to understand how much risk you can take with your investments. That work will continue to hold you in good stead through difficult times like this.
There are often reasons to sell out of shares. The chart below shows a few different reasons over the last 11 years such as the Ebola outbreak or Brexit. The important message to hold onto is that over time the market has recovered and allows investors 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, assuming a starting point of $10,000, you would have only earned $3,650 over the last 11 years versus a potential $15,970 in Australian shares.
Speak with your adviser
If you have any further questions, please reach out to us.