Since December we have seen what looked to be an isolated health scare limited to a region of China turn into a global crisis as the coronavirus has spread. Beyond the human tragedy, the virus has also had a disruptive impact on the global economy. We have recently seen a violent downturn in the financial markets and a growing worry that the damage to the global economy could result in a recession. Tourism, business travel and supply chains have been affected. Shortages of various products are expected in the short-term. Grandhood’s Chief Investment Officer, Eric Crosby, explains the impact of the coronavirus on the global economy and financial markets.
“Uncertainty and fear have never been good for financial markets,” says Eric Crosby. “And that is certainly true of the past couple weeks.” After making new all-time highs in US equities in the middle of February, we saw a major sell-off in risky assets after virus cases spiked in Italy. The result was the worst week in the equity markets since the height of the financial crisis of 2008. Equities, high yield corporate bonds, real estate funds and oil were all hurt while a flight to quality led investors to buy gold and government bonds.
Before the virus hit, global economic indicators, which had not been particularly robust because of the ongoing trade war, were finally starting to show improvement. Then the coronavirus hit. “We’ve started to see early indicators from China that paint a bleak picture,” says Eric Crosby. “Manufacturing sentiment has collapsed to all-time lows as many factories remain closed and business investment stalls.”
Just as the virus has proven to not respect borders, the economic impact from the virus has highlighted just how interconnected our global economies are. The virus represents a supply shock – a reduction in the economy’s ability to make things (quarantined workers can’t produce goods and services). Shortages of various products are possible in the short-term and we’ve already seen runs on certain products in different parts of the world.
Governments and central banks have begun to provide stimulus with targeted fiscal spending in hard hit sectors and hints of coordinated interest rates cuts. The difficulty is we are in uncharted territory when it comes to applying economic policies on a crisis caused by a potential pandemic. Because the global supply chain has been disrupted across many varied sectors, it is unclear how effective traditional economic tools like these will be in stabilizing the economy and financial markets.
“While rate cuts and fiscal spending can help stabilize the financial markets in the short-term, they won’t help put products on the shelves or bring tourists back to affected areas,” says Eric Crosby. “A recession can’t be ruled out, especially in Europe and Japan, but at this stage, recession is still not a given. It’s just too early to understand the entire impact this is having. There is a great deal of complexity with the interconnected global economy. At the very least, I would expect further volatility in the markets until the spread of the virus starts to decline.”
With so much uncertainty with how and when the virus will be resolved, it can all feel a bit confusing when thinking about your savings. It’s in these times of crisis that it can be useful to remember that saving for retirement is a lifetime activity, which includes both good times and bad. Fortunately, there are three characteristics to your Grandhood savings that help reduce the impact from exogenous shocks:
1. Grandhood’s long-term investment approach means you avoid the pitfall of trying to time a volatile market
2. Your savings are invested using a so-called “Life cycle” investment strategy where the level of risk of your investment portfolio is linked to your stage in life. This means that as you get older and your total savings pot grows, we reduce the risk in your portfolio which decreases the negative impact from any unforeseen market shocks
3. Because you add to your savings each month over several decades you are essentially following a “kroner cost averaging” strategy which acts to smooth out or counterbalance the effects of short-term market volatility on your portfolio
Each of these characteristics are designed to improve the robustness of your investment portfolio over time and help to weather the storm. We remain vigilant to the developing situation and confident in our long-term investment strategy.
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