Global stock markets dropped sharply yesterday with the MSCI All Country World Index down 6.7% in EUR. Emerging markets fell slightly less (-5.5% in EUR) while the sell-off hit developed markets hardest with the S&P 500 Index down 9.5% and the FTSE 100 and EURO Stoxx 600 both 11.0% lower.
1. Stock markets fell sharply again yesterday - what caused it?
The sell-off was driven by growing uncertainty over the short and medium-term impact of the coronavirus, which continues to spread. Markets have been jittery since the middle of February when COVID-19 cases were first reported outside of China and investors then reacted negatively last weekend to Saudi Arabia's starting an oil price war with Russia.
With investors already nervous, stocks fell yesterday following President Trump's decision to ban travel from Europe and fears that prolonged economic disruption from the coronavirus could cause a global recession. There was further disappointment when the European Central Bank decided not to cut interest rates further with investors fearing that it might not have enough ammunition left to save the economy from the effects of the virus.
2. How are SKAGEN's funds performing?
With most sectors, countries and companies sold-off, our funds haven't escaped the correction and have fallen broadly in line with their respective benchmarks both yesterday and for the week.
It is reassuring that our investors recognise the unprecedented nature of recent events and have remained invested with us, meaning that we (and they) haven't had to sell stocks and crystallise these paper losses.
3. What is SKAGEN doing about the current situation?
We are monitoring the virus impact on our holdings carefully and our concentrated portfolios also help to understand any new risks they are individually exposed to. All our funds are well diversified by country and geography so are not over-exposed to a particular market segment. We also typically avoid companies with excessive levels of debt or weak cash-flow, which are expected to be most threated by any extended economic slowdown.
The price falls and market volatility also provide a very good opportunity to take another look at companies we previously owned or considered for the portfolios. Some of the best long-term investments are made during periods of market turmoil.
4. What do you think will happen next and should I be worried?
European stock markets recovered some of their losses on Friday as central banks around the world, including the US, Norway and Australia, stepped in to provide market stability. Several financial regulators internationally have also temporarily banned short selling to reduce further downward pressure on stock markets.
The best advice is to follow your long-term investment plan and resist making short-term changes to your portfolio in response to extreme market moves; losses are only realised when you sell! Staying invested in the stock market usually provides solid returns over time precisely because of the added risk and volatility. Keeping a long-term perspective will be rewarded.