MKC Wealth Bulletin

Market Volatility – Our View

Our clients are well versed in the medium term benefits of strategic asset allocation in targeting risk. This uses various asset classes to soften some of the volatility in global equity markets. The higher a person’s risk profile, the higher the equity content of their portfolio and the higher the volatility. 

Stock markets will always experience varying levels of volatility as company valuations stretch and contract. However, markets can fall more dramatically if there is a catalyst. Dramatic falls are known as corrections, and one thing that all corrections have in common is that the catalyst creates an unusually high level of uncertainty. 

We believe the Coronavirus pandemic is the main catalyst for the market correction, whilst at the same time the turmoil in the oil market has turbo charged volatility. With Coronavirus taking hold globally it is almost certain that there will be an impact on company earnings, at least over the coming quarter, and possibly the following quarter.

That said, the nature of Coronavirus is such that the panic is likely to disappear after a relatively short period of time. In this respect it’s unlike previous catalysts which were, by their nature, much longer-term e.g. the Financial Crisis, which lasted for several years. We observe that once Coronavirus has run its course, the main driver behind the current market correction will no longer exist. Indeed, the low oil price coupled with unprecedented levels of government spending may be very positive for the markets.

Given the belief that this current bout of exceptional market volatility is a short-term issue, anybody who is already invested could sit tight and ride it out. To make any changes to investments may risk unnecessarily crystallising a loss, and the likely indecision about when to reinvest may compound losses.

For anybody sitting on surplus cash, if, as widely believed, this correction is a relatively short-term phenomenon, one may have a once in a generation opportunity to take advantage of the current sell-off. In effect, equities appear to be trading at a tremendous discount to their intrinsic value. As and when markets recover this discount is likely to disappear very quickly generating substantial profits over a short period of time.

Please feel free to share your views or get in touch to discuss any of the issues raised in our bulletin.

Best wishes

Barry