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FTSE 100 shocks – our view on a fearful market

At the moment the market is awash with fear, but it’s important to hold onto reality.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The past week on the stock market has been one of the most dramatic in the modern era. The last four days has included two of the 10 worst days in the history of the FTSE 100 and the worst day since 1987.

That reflects some major events in the global economy. The coronavirus outbreak has seen the Italian government place the entire country on lockdown. It seems likely the virus also contributed to Saudi Arabia’s decision to spark a price war in global oil markets that saw the price of oil fall by over 30% on Monday.

However, the direct impact of these events on companies is comparatively small, with some notable exceptions. Coca-Cola’s sales in Italy, for example, are minimal and you’d usually expect lower oil prices to boost consumer spending. Yet Coca-Cola’s share price has fallen 12.2% in the past week.

Investors are gripped by fear of the unknown rather than living in the present and what they can control.

Who’s really at risk?

The market is not being completely irrational. There are good reasons to be worried at the moment.

Smaller oil companies are facing a fight for survival at current oil prices, as are US shale producers. Even the oil majors will have to make difficult decisions between maintaining the dividend and investing in future development.

Travel companies are also likely to be hard hit, and we think weaker players look increasingly troubled. These companies tie up huge amounts of capital in planes, cruiseships and hotels, and have to take on a lot of debt to fund it. If passengers suddenly stop booking, funding debt repayments, staff costs and other expenses becomes increasingly difficult. The larger, more financially secure businesses should weather the storm and could emerge stronger after the competition have fallen by the way side. It will be painful though.

Not all companies are made equal

Look beyond the oil and travel sectors and we don’t really have much information to estimate the impact of recent disruption. Most companies that have reported results in the last week or so have said that it’s too early to tell what the impact of the coronavirus will be.

The market’s suggesting we’re going to see widespread economic damage across the board. In fact it’s indiscriminately pricing in some serious damage to profits. That seems unfair to us.

If the coronavirus causes an economic downturn then all companies will likely struggle, but while a rising tide lifts all boats a falling tide doesn’t sink all ships. Most companies have weathered economic ups and downs in the past, and we think most companies will weather this.

Stick to what you know

Warren Buffett, one of the world’s most famous and successful investors, says investors should “be greedy when others are fearful”. Historically it’s an approach that would have served you well.

Now we’re not saying we’re at peak fear yet, and there is certainly scope for things to deteriorate further – with Italy style lockdowns across the world. But at times like this it can pay not to get caught up in the wider market panic and stick to what you know and can control rather than what’s circulating in the press or online.

This article isn’t personal advice and past performance isn’t a guide to the future. If you’re not sure if an investment is right for you please ask for advice.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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