Central banks take action to tackle coronavirus

Posted by Liz Rees in Latest insights category on 16 Mar 20

Global response

The US Federal Reserve made a 1% emergency cut in interest rates on Sunday, bringing them close to zero. It also announced an additional $700bn of asset purchases and enhanced credit facilities for commercial banks.

The European Central Bank (ECB) and the Bank of Japan (BOJ) had less room for manoeuvre, with interest rates already in negative territory, so are launching asset repurchase programmes.

Can recession be avoided?

In 2019 global growth was 2.9%, if it dips below 2.5% for 2020 then the world is in a recession, technically. Given much of Europe is in lock-down and the US halting flights from Europe and the UK, it seems growth will be hit hard and a technical recession likely.  

However, there is still confidence that the slowdown will be temporary; the stimulus should help release pent-up demand when things begin to return to normal. If other central banks follow the UKs lead and boost fiscal stimulus that would also support economic activity.

A black swan brings volatility

Extreme levels of volatility in stock markets continues. Asian markets fell overnight whilst European shares opened sharply lower today.

This crisis is a ‘black swan’; an unpredictable event that comes out of nowhere and has a major effect. However, alarming as they are, when we look back through history, they appear as little more than a blip on long-term charts.

We can perhaps take some reassurance from the fact that China's domestic recovery has begun, although faltering international demand will remain a drag on growth for the country. Since the end of January the MSCI China is down by 4.8% compared to a fall of 18.4% for the MSCI All Countries World index*.

Sticking to your long term plan

It is important to keep our emotions in check and avoid making irrational decisions; have a plan and stick to it.

At Willis Owen we conducted some analysis. This showed that over any rolling 10-year period, since 1990, the MSCI World index produced a positive return 96% of the time. Over the same period the index, on average, produced a total return of 105.5%.

Only if you had bought around the peak of the dotcom bubble and subsequently sold during the lows of the global financial crisis would you have lost money over a 10 year period since 1990. Clearly none of us can predict the future but this analysis helps to place historic market volatility in context for those with a long-term view.

Many fund managers are following Warren Buffet’s advice to ‘be greedy when others are fearful’. Schroder’s well-respected value team believe that this is an environment that requires ‘calm heads and dispassionate decision making’. They are sticking to their process of assessing potential upside versus expectations and taking advantage of any attractive opportunities in their Schroder Recovery fund.

Don’t let short-term volatility put you off using your ISA or SIPP allowance.  You can secure your allowances with cash and chose funds later. Alternatively you can drip feed monies into the market if you prefer.  

*Source: FE analytics as at 16 March 2020, total return in local currency