COVID-19 – Is this a financial crisis?

Watermark Wealth Management is a busy office, with hundreds of loyal clients, many of whom have been through the dotcom crash and global financial crisis with us alongside them. As a business, we quickly adapt new ways of working and use the learning we gain to improve our practices when this current health crisis is over. There is much change at the moment, but are we in a financial crisis?

The multi-asset approach that we have adopted for our client investments has protected everyone from the worst of this correction, yet, it can still be worrying to see your money fall in value.

Financial markets respond badly to uncertainty, so the current market crash is only to be expected based on the uncertainty about the breadth of contagion and final economic impact from COVID-19.

However, we must stress that this is not a Financial Crisis and here’s why. Financial crises are marked by two key factors:

1. They tend to be preceded by an extraordinarily rapid increase in borrowing (of a speed that we have not seen over the last 10 years), this is often as a result of financial de-regulation (quite the opposite today) and an overextension of credit to un-creditworthy borrowers as a result of imprudent lending standards, especially by weak banks with inadequate capital (again no systemic evidence of that today).

2. Most are also associated with banks becoming dangerously exposed to a highly leveraged asset classes such as property, which is used in turn to collateralise yet more loans. Again, there is little evidence of this today.

Financial crises lead to deep recessions and take years to recover from as with the 2008/09 global financial crisis.

As we stand today, the strength of the global economy and its financial system gives us more confidence that the economic effects of COVID-19 can be managed. Global central banks are providing massive monetary stimulus in the form of interest rate cuts and by pumping money into the financial system to provide liquidity. This action has been supported by massive fiscal stimulus from global governments; indeed, the action taken by the UK government is unprecedented.

The stock market sell-off has been nothing less than sharp and brutal. This has led to millions of investors throughout the UK receiving notifications that their investments have fallen by at least 10% in the current reporting period, usually calendar year quarters e.g. January to March. Some higher-risk investors have already received notifications that their portfolios have fallen by at least 20% in the same period.

However, in past instances when there has been such a sharp sell-off and stimulus is delivered in such abundance, we have seen an equally sharp recovery in the very same markets. 

Without doubt, many companies will suffer a fall in profits, and some may fail in this crisis, but the UK stock market was already undervalued relative to global markets due to the three plus years of Brexit uncertainty. And now, when we see good companies like Royal Dutch Shell and Rolls Royce, which have both fallen in value by 60% and 67% respectively, investors should be excited at the opportunity.

In simple terms, the UK FTSE 100 stock market index has fallen around 36% from its peak from c. 7800 to c. 5000. Just to get back to 7800 from 5000, the market needs to deliver a 56% return. And, to give some added perspective, the index first reached the 5000 level on the way up in September 1997.

As always, things may get worse before they improve, but if we take a 5,10,15 year time horizon, many of us will not get another opportunity like this to invest new cash in our lifetime.

How Watermark has protected its clients

Many of the underlying fund managers utilised in our client portfolios, had already re-deployed money from growth stocks to value stocks throughout last year. This has helped to provide protection at the fund level.

Furthermore, the multi-asset approach that we take means that some funds will even be rising at this time and it is this that protects us from the worst the markets throw at us.

If you have any questions or need advice during this time, please call us on 01278 794499 or visit our contact page for support.

This is a time for us all to stay calm, rational and above all, stay safe.