The attached note looks at the plunge in share markets over the last week. The key points are as follows:
- Share markets have fallen sharply on the back of coronavirus concerns.
- Shares may still have more downside and the uncertainty around the coronavirus crisis is very high, but we are of the view that it’s just another correction.
- Key things for investors to bear in mind are that: corrections are normal; in the absence of recession, a deep bear market is unlikely; selling shares after a fall locks in a loss; share pullbacks provide opportunities for investors to buy them more cheaply; while shares may have fallen, dividends are smoother; and finally, to avoid getting thrown off a long-term investment strategy it’s best to turn down the noise during times like this.
The plunge in share markets over the last week has generated much coverage and consternation. This is understandable given the rapidity of the falls – with US shares having their fastest 10% fall from an all-time high on record – and the uncertainty around the coronavirus (Covid-19) and its impact on economic activity. From their highs to recent lows US shares have fallen 13%, Eurozone shares have fallen 16%, Japanese and Chinese shares have fallen 12% and Australian shares have fallen 12%. This note looks at the issues for investors and puts the falls into context.
What’s driving the latest plunge?
The plunge basically reflects two things.
- After very strong gains from their last greater than 5% correction into August last year, share markets had become vulnerable to a correction.
- The uncertainty around the impact of the coronavirus outbreak which is on the verge of becoming a pandemic and its impact on global growth has unnerved investors dramatically. Shares had recovered from their initial fall on the back of the virus into early February on signs that the number of new cases in China was falling (which is continuing), limited cases outside China and expectations that policy easing would limit any damage. This has been blown apart in the last week as cases have popped up en masse in Italy, South Korea and Iran, more cases have appeared elsewhere around the world and this has resulted in expectations of a deeper and longer hit to global growth.
After big falls shares have become technically oversold, measures of negative investor sentiment such as the VIX (or fear) index and demand for option protection have spiked. So, shares could have a short-term bounce. But given the uncertainties around Covid-19 – with more cases in the US and Australia likely to pop up – the situation could get worse before it gets better, so the share pullback could have further to go – notwithstanding short-term bounces.
Considerations for investors
Sharp market falls with headlines screaming that billions of dollars have been wiped off the share market are stressful for investors as no one likes to see the value of their investments decline. The current situation is doubly stressful because of fears for our own and others health – particularly for the elderly. However, several things are worth bearing in mind:
First, while they all have different triggers and unfold a bit differently to each other, periodic corrections in share markets of the order of 5%, 15% and even 20% are healthy and normal. For example, during the tech/dot-com boom from 1995 to early 2000, the US share market had seven pull backs greater than 5% ranging from 6% up to 19% with an average decline of 10%. During the same period, the Australian share market had eight pullbacks ranging from 5% to 16% with an average fall of 8%. All against a backdrop of strong returns every year. During the 2003 to 2007 bull market, the Australian share market had five 5% plus corrections ranging from 7% to 12%, again with strong positive returns every year. More recently, the Australian share market had a 10% pullback in 2012, an 11% fall in 2013 (the taper tantrum), an 8% fall in 2014, a 20% fall between April 2015 and February 2016, a 7% fall early in 2018, a 14% fall between August and December 2018 and a 7% fall into August last year. And this has all been in the context of a gradual rising trend. And it has been similar for global shares – with the last big fall in US shares being a 20% plunge into Christmas eve 2018. See the next chart. While they can be painful, share market corrections are healthy because they help limit a build-up in complacency and excessive risk taking.
Source: Bloomberg, AMP Capital