Market sell-off oil price and virus fears
Market sell-off oil price and virus fears
• 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.
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
This report is prepared by the IOOF Research team for:
Bridges Financial Services Pty Limited ABN 60 003 474 977 AFSL 240837, Consultum Financial Advisers Pty Ltd ABN 65 006 373 995 AFSL 230323, Elders Financial Planning ABN 48 007 997 186 AFSL 224645, Financial Services Partners ABN 15 089 512 587 AFSL 237 590, Millennium3 Financial Services Pty Ltd ABN 61 094 529 987 AFSL 244252, RI Advice Group Pty Ltd ABN 23 001 774 125 AFSL 238429, Shadforth Financial Group Ltd ABN 27 127 508 472 AFSL 318613 (‘Advice Licensees’).
This report is not available for distribution outside Australia and may not be passed on to any third person without the prior written consent of the Advice Licensees.
Declaration of interests: The Advice Licensees and/or its associated entities, directors and/or its employees may have a material interest in, and may earn brokerage or other fees from, any securities or other financial products referred to in this report, or may provide services to, do business with or seek to do business with the company referred to in this report. The Advice Licensees and associated persons (including persons from whom information in this report is sourced) may do business or seek to do business with companies covered in its research reports. As a result, investors should be aware that The Advice Licensees or its associates may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making an investment decision. A list of material interests of The Advice Licensees and its associates, and product issuers referred to in our research reports, can be found on the following IOOF website link http://www.ioof.com.au/adviser/investment_funds/ioof_advice_research_process
The information contained in this report is for the use of advisers of AFSL entities authorised by The Advice Licensees in writing.
General Advice Disclaimer: The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the general advice contained in this report, an investor should assess their own circumstances or seek advice from a financial adviser. Where applicable, the investor should obtain and consider a copy of the prospectus or other disclosure material relevant to the financial product before making any investment decision to acquire a financial product. It is important to note that the price or value of financial products go up and down and past performance is not an indicator of future performance.
Analyst Certification: This report has been prepared and issued by the IOOF Managed Funds Research team members, who certifies that: (1) all of the views expressed in this report accurately reflect his or her personal and professional views about any and all of the subject securities or issuers; and (2) no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein.
The writers, and/or entities in which I have a pecuniary interest, None.
The Advice Licensees believe that the information contained in this report has been obtained from sources that are accurate but has not checked or verified this information. To the extent permitted by the law, The Advice Licensees, its related bodies corporate, its directors, officers, employees, authorized representatives and agents accept no liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of the information contained in this report, or in relation to, the contents of or omissions in this report.
This report is current as at the time of publication but may be superseded by future publications. You should confirm the currency of this report and obtain summary information about: material interests and Research analysts’ holdings; the qualifications and experience of the IOOF research team; and the coverage, criteria, methodology and spread of ratings from http://www.ioof.com.au/adviser/investment_funds/ioof_advice_research_process
If an investor requires access to other research reports they should ask their adviser who can obtain these from their dealer group intranet.