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Market Update - Coronavirus and the argument over oil supply

12/03/2020

Many of our clients will be concerned seeing the news headlines regarding global stock markets and understandably so. The reasons for the turbulence are the ongoing crisis regarding the Coronavirus (COVID-19) and the argument over oil supply between Saudi Arabia and Russia. Head of Adroit Financial Planning, Neil Jefferies, looks at both in more detail. 

Coronavirus

Markets are very concerned about the long term impact that the virus will have on global economies. Issues such as staff sickness, supply chains and travel bans all affect businesses and their ability to trade.

The main problem is that no one can say for sure just how long the crisis will last and so markets are selling off. The news yesterday that President Trump has banned travel from Europe to the US hasn’t helped but the UK and Ireland remain exempt from that ban.

We already know that Italy has implemented drastic travel restrictions and has been badly hit but it should be borne in mind that Italy has on average, the oldest population in Europe and sadly, it would appear that the elderly and those with underlying health conditions are most at risk.

What’s happening with oil?

For those of us who remember the 1970s, it was OPEC that held the rest of the world to ransom over the supply of oil to the West, and Saudi Arabia in particular. These days, there are more oil producing countries than before and Russia is one of these.

The US is also producing huge quantities of shale oil and gas. All of this has meant that supply has been high and oil prices over the last five years or so have been relatively low.

In 2017, OPEC and Russia had an arrangement to restrain supply to keep prices stable. This imploded spectacularly this week when Russia refused to go along with OPEC plans to increase supply to combat the impact of Coronavirus. As a result, Saudi Arabia slashed its prices in an attempt to heap pressure on Russia and retake market share.

This had a negative impact on markets because many of the main stock market indices (such as the FTSE100) have a lot of exposure to oil companies such as Shell, BP, etc. Their share prices dropped significantly dragging the markets down further.

What happens next?

This will largely depend on how governments respond to Coronavirus and how long it will take to slow the spread of the disease. It will also be affected by the oil supply situation.

However, we saw the Chancellor of the Exchequer set out yesterday the measures he will put in place to protect the UK economy, and the Bank of England has cut interest rates to 0.25%. At Adroit, we expect to see governments around the world, as well as the central banks, provide measures to do the same for their respective economies.

What about my portfolio?

There is no doubt that these are worrying times for investors. However, our view is that markets will recover in the short term and so being patient and waiting out the market turmoil is the way forward.

I won’t pretend that portfolios haven’t been adversely affected but selling now will crystallise any losses and when markets do recover, it is likely to be very quickly.

It’s far from ideal to sell at the bottom and buy at the top. In fact, many of our investment providers are seeing this as a buying opportunity. The portfolios that we advise on are well-diversified and being managed by carefully selected experts.

More information 

If you're concerned, please contact your Adroit Financial Consultant. They will be on hand to answer any questions you may have.

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