The corona virus is spreading across the globe, and global equity markets have plunged more than 20% due to investor worries about the negative impact of the coronavirus on economic growth and corporate earnings. Moreover, a sharp fall in oil prices sparked by a price war between Russia and Saudi Arabia has added to the tensions in the financial markets.
We have asked Danske Bank’s chief strategist, Henrik Drusebjerg, to answer 3 topical questions about the financial markets and how you should react as an investor:
1. Why is the coronavirus having such a huge impact on the financial markets right now?
The coronavirus in itself is generally not the problem for the global economy, but rather the extensive precautionary measures being taken to contain the outbreak. Recent days have seen an intensification of these initiatives around the world, such as flights originating from Europe being banned from landing in the US. Moreover, we expect that more countries will introduce further measures in the near future, and this could have a marked negative impact on global economic activity overall.
Nevertheless, we have a clear expectation that the economic setback will be temporary, and that the global economy will recover in the second half of 2020. Governments and central banks around the world are currently busy initiating extensive measures to support the economy and hard-pressed companies, and that reinforces our expectation of an economic recovery later this year.
2. When do you expect equity markets to bottom out?
Predicting when equity markets will bottom out is an impossible task, and in the short term we expect further volatility as the news and the corona crisis unfold. If you sell your equities now, you may well be lucky and have the chance to buy them back cheaper in a week or a month’s time, but you also risk missing out on any price hops.
We generally assess there to be a lot of negativity priced into equities following recent, sharp price falls. In our opinion, these major price falls reflect investors seeing a considerable risk of a protracted economic recession – but that is not our expectation at Danske Bank. Given this, equity prices are in fact beginning to look relatively attractive right now.
Investors should also remember that equity markets are typically some way ahead of the general economy. Even though we do not expect an economic recovery to kick in until H2, that does not mean equity markets will wait that long to turn. A turnaround in equity markets could materialise much earlier once investors begin to see the first signs of a pick-up on the horizon.
3. Should I sell my investments?
We generally recommend that investors hold onto their investments if they suit the investor’s investment profile – including their risk appetite and investment horizon. As already mentioned, our expectation is that the negative economic fallout from the coronavirus will be temporary.
Historically, equities have generated attractive returns over time, and that is also our expectation going forward. However, we will always experience periods with significant price falls along the way – that is the nature of the equity market, and we have experienced such situations a number of times over the years.
Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.