During March and April, we witnessed a considerable amount of global market volatility and instability, which is why we have been spending a lot of time proactively speaking to our clients in order to provide as much reassurance as possible. As the COVID-19 outbreak sweeps across the world and results in nationwide shutdowns, many UK investors are naturally worried about their portfolios as the markets have reacted.
On the 12th of March, for instance, the FTSE 100 recorded its worst performance since 1987, dropping over 10% following the U.S. announcement of restricted travel from mainland Europe. Indeed, by the end of the month, the index had recorded its largest quarterly fall since Black Monday in 1992.
However, Britain is not the only country to have been affected. We have noticed the effect of COVID-19 on virtually every major economy across the world. In the U.S., for example, the 1st of April logged the worst beginning to a business quarter in history for the S&P 500 and Dow Jones, with losses of at least 4.4%. European markets have also been hit, with the Stoxx Europe 600 finishing the first quarter at a 23% loss.
Given this widespread “bear market”, isn’t it safer to keep your investments confined to one country, just in case other countries are worse hit by COVID-19 than others?
In our professional experience, we would caution against dramatically changing a client’s investment strategy as a result of hitting harder times. Indeed, there are very good reasons to stay globally invested; three of which we share with you here.
The markets are never predictable, but this is especially true in light of the COVID-19 outbreak. Given the unknowns surrounding the virus, it’s still very difficult to anticipate how it might spread and affect different countries’ economies. This provides a strong reason for not placing all of your investment eggs in one basket, but instead, spread them out appropriately across different countries.
Consider the start of the outbreak. In early March, China seemed to be taking the brunt of the economic damage. Its city of Wuhan was the pandemic’s source, and the country faced strong widespread lockdown. Chinese production stalled, but markets in the Western world did not initially react. Fast forward to April 2020, however, China’s lockdown appears to be lifting and China has passed the U.S. as the world’s most popular venue for stock market listings in Q1, raising over $11bn in three months. The Western world, however, is now struggling.
Of course, everything could change again dramatically in the coming weeks and months. The lesson: don’t assume that one country is a “safe bet” for investments and write others off as unviable, leading to an under-diversified portfolio.
There is another important reason to include global investments in your portfolio; they cannot really be avoided! Consider that U.S. stocks comprise 54.4% of the world’s market capitalisation in April 2020, and many of these companies will have operations, supply chains and customers based overseas. Within the UK, moreover, many of the FTSE 100 companies also include foreign operations and revenue streams.
Many nervous investors look at global investing and think they can avoid excessive damage to their portfolio during a down market, by keeping a “domestic focus”. There is another way of looking at this, however. By trying to confine your portfolio to one country, you could miss out on a range of investment opportunities which are only available elsewhere in the world.
Consider the effects of restricting your portfolio to the UK. As strong as the UK is for certain sectors (e.g. financial services, oil and gas), many industries/sectors are not represented well in our country. Most of the largest tech companies – such as Netflix and Facebook – are based overseas in the U.S., and many high-tech manufacturers are based in Japan (e.g. Hitachi).
By investing globally, you can help to further diversify your portfolio by exposing it to a wider range of sectors. This can enhance balance amongst your investments and shield your portfolio from excessive damage, should certain sectors struggle, compared to others. Consider the impact of COVID-19 on different sectors by the end of March, which has hit sectors such as retail, aviation and hospitality the hardest. Other areas, however, actually seem to be experiencing a boom in business due to the outbreak such as digital streaming, food delivery and hand sanitiser producers.
As we keep saying, if at any point you wish to discuss your investment strategy in more detail, please do get in touch.
This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.