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UK stock market update – a major shake-up

Yesterday, we looked at how the coronavirus pandemic has impacted stock markets across the globe. Today we review how the pandemic has shaken up the UK economy and what we think investors should consider in these tough times.

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.

2020 has been a tough year for investors so far. The coronavirus pandemic has affected both health and wealth. There are 2,626 confirmed UK cases, but many thousands more are estimated to have the virus.

At times like this, it's best to avoid knee-jerk reactions in relation to investments . We prefer to step back and look at the facts.

We recognise this situation has been changing quickly. The data and commentary in this article is correct to 17 March. As we've seen in recent weeks, share prices can fall as well as rise and you could get back less than you invest.

What’s the impact to our economy?

Travel bans, cancelled sporting events, deserted high streets and volatile stock markets. These are just some of the impacts of coronavirus so far, and there are concerns about the potential drag on the economy too.

Pubs, restaurants and cinemas are just some of the businesses that have already started to feel the effects of social distancing. And the lost takings probably won’t be recovered.

If a family decides not to go on their monthly trip to the cinema for the next three months, it’s unlikely they'll go an extra three times when virus fears are lifted.

There are implications for other sectors too. Uncertainty about the future could mean companies look to cut costs by scaling back expansion plans, or laying off workers. If people are fearful for their jobs, they'll put off big decisions like buying a new house or car, until there's more certainty.

For any chance at normality, the government will need to provide support – a substitute to these missing revenues and wages.

If the crisis escalates, the entire country could be put on lockdown – as we’ve seen in Italy and Spain – and the economic impact could be even more severe. Consumer spending would fall dramatically, and this could act like a massive brake on the economy, potentially tipping us towards recession. The economic pain could go on for quite a while too. Having imposed bans and restrictions, the government may be cautious about lifting them for fear of re-infection.

What measures are being taken?

On 11 March 2020, the Bank of England slashed interest rates from 0.75% to 0.25% in an effort to stimulate the economy. Lower interest rates are designed to encourage savers to spend or invest their money, rather than holding it on deposit, in turn boosting consumer spending and the stock market.

The government also looked to prop up the economy with a number of measures designed to limit the impact of coronavirus. The measures include an initial £330bn of guarantees. Business continuity loans mean businesses that need access to cash to pay rent, salaries, or suppliers will get a government-backed loan on attractive terms.

Chancellor Rishi Sunak also announced an additional £20bn package of grants and tax cuts for business and offered people in financial difficulties the opportunity to delay their mortgage payments for up to three months. The new chancellor’s also looking into a package of additional support for specific areas that have been particularly affected by coronavirus, like the airline industry.

These are positive measures, but what markets really want to see is a sign that the virus caseload has peaked, and then that the economic recovery is on track. Until then, we should expect more short-term volatility.

What’s happened to share prices?

The stock market began falling in mid-February, when the virus spread across Italy, confirming to investors that it wasn’t a China-only crisis.

The past few weeks on the stock market have been some of the most dramatic we’ve ever seen. The FTSE 100, an index of the UK's biggest 100 companies has lost 29.0%* since the start of the year. In recent weeks it's seen some of its biggest daily drops in history.

FTSE 100: 10 biggest daily drops in history

Date Daily drop
20/10/1987 -12.2%
12/03/2020 -10.9%
19/10/1987 -10.8%
10/10/2008 -8.8%
06/10/2008 -7.9%
09/03/2020 -7.7%
15/10/2008 -7.2%
06/11/2008 -5.7%
21/01/2008 -5.5%
29/09/2008 -5.3%

Past performance is not a guide to the future. *Source: Lipper IM to 17/03/2020

Small and medium-sized companies have lost 38.1% and 38.8%* respectively since the start of the year. They tend to be less resilient than their larger peers, and would be particularly affected if consumer confidence fell and unemployment rose, tipping the UK into recession.

It's important to remember that many companies have lived through ups and downs in the past and come out the other side. In some cases, sharp share price falls are justified. In others, they’re not. Talented stock pickers will use the current stock market weakness to invest in some exceptional companies at knock-down prices.

Which industries have been hardest hit?

Share prices fell across the board, with all industries losing money since the start of the year.

Some of the worst performers have been travel and leisure businesses. Widespread travel bans and the closure of national borders across the world look set to cost the travel industry dearly. The car making industry’s also taken a hit, as investors were worried people would put off the decision to buy new cars until there's more economic certainty.

Oil & gas lost money too. Saudi Arabia and Russia failed to reach an agreement about global oil supply, resulting in Saudi Arabia upping production and a collapse in the oil price.

Companies with high levels of debt have performed poorly on the whole due to concerns that falling business levels could make it more difficult for them to make interest payments.

So-called 'defensive' companies, such as those in the utilities, pharmaceutical and tobacco industries held up slightly better. People need to heat and light their homes, take their prescribed medication and feed their tobacco habit regardless of what's happening in the broader economy. So investors were less concerned about the futures of these businesses.

FTSE All-Share sector performance in 2020

Scroll across to see the full chart.

Past performance isn’t a guide to the future. Source: Lipper IM to 17/03/2020.

Overall, we prefer to invest in a portfolio diversified across many industries. It reduces the chances of being fully invested in the worst-performing areas at any given time.

UK Growth Funds

Our Wealth 50 selections in the UK Growth sector have delivered mixed performance since the start of the year, relative to their benchmarks.

Unicorn Outstanding British Companies did best, outperforming both the broader UK stock market and peers in the UK All Companies sector, but it still lost money. The fund benefited from a focus on high quality businesses and a lack of investments in the oil and gas sector, which performed poorly.

Majedie UK Equity was the worst performer, marginally underperforming its peers. Despite lacklustre returns recently, Majedie's UK Equity Team have a good long term track record.

Recent performance

31/12/2019 To 17/03/2020 Key Investor Information (KII)
AXA WF Framlington UK -32.2% KII
LF Majedie UK Equity -34.1% KII
Unicorn Outstanding British Companies -24.0% KII
FTSE All-Share -30.4%
IA UK All Companies Chain-Linked index -33.9%

Five year performance

Annual percentage growth
March 15 -
March 16
March 16 -
March 17
March 17 -
March 18
March 18 -
March 19
March 19 -
March 20
AXA WF Framlington UK N/A 17.1% 6.6% 3.1% -21.6%
LF Majedie UK Equity -6.2% 23.7% -2.3% 1.4% -30.2%
Unicorn Outstanding British Companies 6.2% 10% 8.7% 2.3% -16.2%
FTSE All-Share -5.8% 23.3% 1.6% 4.4% -24.4%
IA UK All Companies index -3.7% 19% 3.6% 1.6% -26.4%

Past performance is not a guide to the future. Source: Lipper IM to 17/03/2020.

N/A - where no figures are shown performance data is unavailable.

UK Equity Income Funds

Troy Trojan Income was the best-performing Wealth 50 fund in the UK Equity Income Sector, beating both its peers and the broader UK stock market. The manager's more defensive investment style means the fund tends to hold up relatively well compared to it’s peers when markets are weaker.

Marlborough Multi Cap Income was a weaker performer. The fund's focus on smaller companies caused a drag on returns, as did investments in oil company Royal Dutch Shell and luxury goods maker Burberry.

Recent performance

31/12/2019 To 17/03/2020 Key Investor Information (KII)
Artemis Income -33.7% KII
Aviva Investors UK Listed Equity Income -35.0% KII
Jupiter Income -36.1% KII
Marlborough Multi Cap Income -36.2% KII
Threadneedle UK Equity Income -32.2% KII
Troy Trojan Income -26.6% KII
FTSE All-Share -30.4%
IA UK Equity Income -34.4%

Five year performance

Annual percentage growth
March 15 -
March 16
March 16 -
March 17
March 17 -
March 18
March 18 -
March 19
March 19 -
March 20
Artemis Income -4% 17.4% 5.1% 2.3% -26.4%
Aviva Investors UK Listed Equity Income -0.5% 15.8% 1.7% 2.5% -27.5%
Jupiter Income -3.3% 21.7% 0.3% 0.8% -32.8%
Marlborough Multi Cap Income 3.5% 6% 7% 1.8% -27.8%
Threadneedle UK Equity Income -3.7% 17.3% -2.9% 5.3% -25.4%
Troy Trojan Income 5.3% 13% -5.6% 7.7% -19.2%
FTSE All-Share -5.8% 23.3% 1.6% 4.4% -24.4%
IA UK Equity Income Chain-Linked Index -2.6% 15.6% 1.2% 2.3% -28.1%

Past performance is not a guide to the future. Source: Lipper IM to 17/03/2020

As consumers and businesses adjust their behaviour to mitigate and combat the coronavirus outbreak, this will likely impact economic activity and company earnings, potentially leading to dividend cuts. This isn't necessarily a bad thing though. Adrian Frost, the manager of Artemis Income, suggests dividend cuts may be necessary to preserve long term earnings potential:

"We try to invest in businesses that have strong management – who think like business owners and who should therefore prioritise actions that will be in the interests of long-term investors. To do this, it might be necessary – indeed preferable – for some companies to reduce or suspend their dividends for the time being."

What should investors consider?

When markets perform poorly, many investors seek to sell their investments and buy them back at a later date. But it’s extremely difficult to do this effectively. Market timing relies not only on you getting out in time, but also choosing the right time to re-enter the market. Poorly-performing stock markets can rebound in a matter of days and overcautious investors could miss out on these gains.

There will always be short term volatility in stock markets, and things could get worse before they get better. But we implore investors to focus on the long term. In previous crises, those who invested in a diversified portfolio and held on to their investments for the long term have generally been rewarded. And long-term investors who saw share price weakness as an opportunity to add to existing investments at a more attractive price, fared even better.

This article is not personal advice. If you’re unsure what to do, please ask for advice.

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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