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 implemented severe bans on travel. For example:
- In Italy, the government has shut down travel within the country until early April because of how many cases they are seeing;
- Australia has imposed 14-day self-isolation limits on all new arrivals into the country.
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 employees. 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.
Governments have been trying to help support growth. An example in Australia includes lowering deeming rates by 0.5% so retirees can access more of the Age Pension as well as a one-off $750 payment. This helps give people income to handle weaker incomes from less hours, for example, with businesses also getting support to encourage them to keep their staff. You are likely to see more efforts here given reports that the Morrison Government is considering a second stimulus package.
Oil deal collapse
Oil prices are based on a mix of how much has been produced vs how much is needed for cars, industry, energy etc. Last 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 large oil producer and by doing this oil prices fell over 27% last 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
Your portfolio is set up with risks like share prices falling in mind. We set it up with other investments like cash or bonds to help reduce the impact of this risk on your wealth. This is at the core of diversification and we have considered how your portfolio will function depending on the market environment. In periods like we have seen in the last week, your investments in cash and bonds will have continued to hold their value or even increased as share prices fell.
Importantly, your portfolio is expected to deliver, even after this week, a long-term return that will meet financial objectives. You will have worked with your Financial 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 you 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 $3,628 over the last 11 years versus a potential $12,569 in Australian shares (as of 16 March).
Speak with your adviser
If you have any further questions, please reach out to your Financial Adviser. Over the long term, being invested is crucial. Cash is not a viable long-run alternative with the cash rate at 0.5% and an RBA cut to 0.25% expected. By contrast, we expect a diversified portfolio to continue being the answer to achieving your objectives.
Prepared by – Cameron Curko
Approved By – Matt Olsen
This report is prepared by the IOOF Research team for:
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