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Market sell-off oil price and virus fears
11/03/2020

Market sell-off oil price and virus fears

What happened?

•    Global share markets have fallen in recent days driven by a collapsed oil deal and coronavirus impacts.
•    The Australian share market fell 19.6% from its peak on 20 February 2020 to 9 March.
•    This means the gains of 2019 have been lost with the index back at Dec-18 levels.
Market-selloff-110320.jpg Source: Bloomberg, IOOF

Why have share markets fallen this much? A case of two shocks

1. Coronavirus fears for global economic growth

Share markets have fallen following growing concerns over a global Covid-19 (a.k.a. coronavirus outbreak). This virus is related to the SARS outbreak that affected Asia, notably China in 2003. It has proven to be difficult to control and sparked outbreaks outside of China, across much of the world with Italy, Iran and South Korea the most notable cases.
As the outbreaks outside of China escalated, investors retreated from shares and fled to safe assets such as bonds as they priced in a weaker economic scenario with expectations of ongoing business struggles.

2. Oil price collapse
Over the previous weekend we saw a new economic shock appear. Oil producers were expected to agree to cut production to support oil prices. However, Russia chose not to participate with the deal failing. This triggered a response by major producer Saudi Arabia to cut prices and hint at increasing production. The threat of lower prices and increased supply saw oil prices fall with WTI Crude oil down 9.7% in one day.
These moves sparked fears of
•    Collapse in the US shale gas industry (which needs higher prices to remain profitable)
•    Economic weakness in oil producing countries, and
•    A greater likelihood of global recession in a very short space of time.

Monitoring and actions being taken

We monitor market volatility and compare it to long term expected volatility. When volatility becomes elevated, we reduce exposure to growth assets in favour of more defensive asset classes to manage risk.
Currently our measure of market risk is at 21.3% for the Australian share market. Our long-term expectation is only 17.7%. This represents a sizeable increase in risk following the Saudi shock to oil prices (on Friday 6th March this measure was 15.5% i.e. within expected levels). 

As a result, we will be adjusting the portfolios as follows in the near term as follows;

Managed accounts – Model Portfolios
1.    Increase exposure to defensive asset classes within each risk profile.
2.    Increase exposure to more defensive strategies within asset classes. For example, in the equities asset class we hold variable beta managers which we expect to be more defensive.

Managed accounts – Direct equities
1.    Increase allocation to cash to bring overall portfolio risk to levels in line with historic market averages (15-16% volatility).
2.    Increase weights to lower-risk stocks, i.e. businesses that have stronger balance sheets and lower exposure to overall market risk.
We are acting defensively today to keep the volatility of the managed account portfolios in line with our long-term expectations. The current situation of heightened risk will subside at some point and at that time we will rebalance back to our long-term strategic settings.

Speak with your adviser

Potential market weakness has been factored into the expectations that underpin client portfolios. Over the long term, being broadly invested in line with the long-term strategic settings (aside from occasional tilts away from long-term settings to manage risk) is the key to achieving your objectives.
If you have any further questions, please reach out to your adviser.



Prepared by – Cameron Curko
Approved By – Matt Olsen

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