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Sell off this week

Sell off this week 981 980 Realm
Where we would normally be providing an investment market update and commentary at this time of the month, events are moving so rapidly that much of the content we had planned to issue has become largely irrelevant.
What the markets were hoping for was a coordinated global response to the coronavirus from governments and central banks, one that was comprehensive, coherent and credible. Unfortunately, in some instances, notably in North America such a response has been slow to materialise.  Though we are now seeing the beginnings of a coordinated action across the world.
The week started with President Trump in a state of denial, blaming the Democrats for starting the panic and suggesting that the coronavirus was really “fake news”.  He was forced to change his view by Wednesday; hen addressing the nation he reluctantly accepted the reality of a global pandemic and then promptly threw markets into disarray by closing his borders to European markets.  It as an ill thought through plan which hit the Stockmarkets hard.
On Thursday Christine Lagarde (new President of the E.C.B) passed up a major opportunity to step in with significant firepower and steady the markets.  She severely disappointed, choosing instead to pass the baton of responsibility to governments around the world suggesting they provide major fiscal packages to stem the fallout from the coronavirus. She did backtrack later however saying “I am fully committed to avoid any fragmentation in a difficult moment for the euro area” and this morning Philip Lane, ECB’s chief economist sought to further calm the waters by saying that they “stand ready to do more” to contain any sovereign debt stress. A better response is beginning to come through from individual countries with governments and central banks acting to inject liquidity to provide a backdrop for economic recovery.
To compound things, markets are not only trying to deal with the problem of the coronavirus but at the same time they are having to adjust to a massive oil price shock following the price war that erupted last weekend between Saudi Arabia and Russia, another unexpected event which will reduce the profitability of an important sector and could threaten some companies and segments such as U.S. shale manufacturers with closure. Such a severe decline in the oil price is deflationary economically and will affect other service industries as well as financial institutions. This is not a welcome development whilst the world tries to reactivate growth. The dangerous brinkmanship between these two major producers is flooding the market with supply at a time when demand has fallen dramatically because of the coronavirus.

In many ways we are in unchartered waters in terms of how this will play out, but with all that has happened one needs to try and step back and in doing so hopefully gain a clearer perspective.

Those of us who have been around long enough will have seen investment markets respond like this before.  Yesterday’s fall was reminiscent of October 1987 and indeed the fall in asset prices was of similar proportion. It is worth bearing in mind that the correction in 1987 took many months to regain but was followed by a ten year Bull market through the whole of the 1990s.  In contrast the last Stockmarket correction during 2007/08 was caused by a structural breakdown in the banking sector, which was far more serious in economic terms and we knew would take a long time to remedy, we believe this is not the case here.
Although the speed and velocity of the market correction was similar to 1987 (considering that one week before the sell-off began the U.S. market hit an all-time high) there is the potential for a V-shaped recovery in prices, if not immediately the global economy, if the data emanating from affected countries proves to indicate a less serious situation than the markets are currently pricing in and if (as we hope) governments and central banks continue to respond to the crisis in a coordinated, coherent and credible way.

Disclaimer:  ‘Where the business has expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. The information contained within this communication is believed to be reliable but Realm Investment Management Limited does not warrant its completeness or accuracy. This communication is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell investments.