Black Monday collapse: ‘Too late to panic’

Oil and illness spark ‘end of reason’. But where does the potent effect of fear leave everyday investors?

Experts have warned investors to strap themselves in for much more volatility as shutdowns, isolations and interruptions begin to have repercussions on a wide range of businesses (PA)

The list of infamous stock market disaster days just grew by one. And it’s not over yet.

This week’s “Black Monday” frantic sell-off of riskier assets in light of the global economic impact of coronavirus paired with an oil price war saw markets around the world plummet. The FTSE 100 alone fell by 8 per cent of its value as trading opened on Monday morning. By Tuesday morning, prompted by hasty stimulus announcements in the US, things were looking a little less catastrophic.

But as the world records thousands more cases of Covid-19, experts have warned investors to strap themselves in for much more volatility as shutdowns, isolations and interruptions begin to have repercussions on a wide range of businesses.

“Our view from nearly two weeks ago that ‘this sell-off is different’ has unfortunately come true, when we feared Italy or other developed nations could follow China’s lead and shut down parts of the country as they desperately try to contain Covid-19,” said Helal Miah, investment research analyst at The Share Centre.

“On top of this we had the inability between OPEC [the Organisation of the Petroleum Exporting Countries] and Russia to come to an agreement to cut oil production in the face of falling prices. Now Saudi Arabia has doubled down and is planning to expand production in an attempt to wipe out the US shale players, sending oil prices overnight down by nearly 30 per cent, the worst since the first Gulf War.”

Nor do economists believe this week’s fall is a short-term event. Some have even described it as a rolling economic crash. The repercussions of the situation we now find ourselves in will continue to rise from the depths as the weeks and months go by, they believe, not least because it’s possible that other, even more economically significant regions could face a similar fate.

“The more weeks pass, the more our ‘this is one of those things’ thesis is challenged,” says George Lagarias, chief economist at global accounting firm Mazars. “Not so much because of the nature of the virus itself, but rather because of the nature of our response. This will be the fourth straight week of negative market returns and the worst downturn since December 2018, which took place over the space of three months.

“While Covid-19 looked like a possible ‘black swan’, the truth of it is that the virus is much less deadly than SARS, MERS or the Ebola outbreak. Yet it has caused significantly more damage to financial markets. Why? We believe it is a confluence of runaway market prices and simple fear. When, in late January, pictures of people hunted by drones and chased with nets in Hubei province made the news, it seems they had an impact on our collective sentiment.”

In other words, we responded by rushing to supermarkets, cleaning out sanitary perishables and preparing for the worst. We significantly cut down discretionary spending like travel, eating out and entertainment outside of our own homes.

“As consumers drew their battle plans, so did governments, who took their cue from China and without much hesitation are now quarantining entire provinces,” Lagarias adds. “Global supply chains and businesses overall are being disrupted as people can’t go to work. The sharp and simultaneous downturn of global economic and financial indices is reminiscent of 2008-09, and businesses are already facing liquidity issues.”

But this week’s dramatic events aren’t simply about stockpiling toilet rolls.

“This weekend’s breakdown of trade talks between OPEC and Russia sparked a nosedive in oil prices, and as about 10 per cent of the UK equity market is composed of oil companies, the FTSE has taken a hit,” explains Robert Alster, head of investment services at Close Brothers Asset Management.

“A fall in oil prices is often a boon for the consumer, cutting fuel costs, but Covid-19 has caused a decline in demand. This has caused wider concern around economic growth, and central banks have had to step up to show they will support liquidity. Fiscal levers will be important too and we look to Rishi Sunak’s Budget on Wednesday for support to the UK economy in the face of these headwinds.”

The underlying advice to investors hasn’t changed since the coronavirus first erupted into the world’s consciousness. There’s no point panicking, don’t start crystallising losses by selling out at a low point, remember there are opportunities even in the deepest market dips. Investing is about long-term planning.

But voices from the City are now warning that if the kind of stimulus measures that we’re looking to the chancellor to implement on Wednesday fail to calm markets, this could be the end of the latest cycle of economic expansion.

“Situations like this should remind us all that you should only invest into the stock market if you’re completely comfortable in the risks and in knowing your money should be locked away for a considerable amount of time,” adds Anthony Morrow, CEO of financial advice firm OpenMoney.

“While it’s difficult to get excited about low the 0.5 per cent interest rates available on cash, it’s vital to make sure you have plenty of savings built up in cash to act as a buffer. The implications of investing in the stock market with money you may need in the short term are serious and it’s only in moments like this that people realise the significance of investing for the long term.”