Be patient – this panic plunge will settle down

A tendency to assume the worst is common to all major market setbacks

Widespread, indiscriminate and savage: when market trading is dominated by algorithms and automated selling it is little wonder share prices have fallen so far and so fast. Private investors have largely remained calm. There has been no deluge of selling orders and indeed, by the end of last week, some tentative advice being offered on bargain-hunting. But how much further might stock markets fall?

Last Friday the FTSE 100 tumbled a further 216 points, or 3.2 per cent, to 6,581. This took the fall over the week to more than 11 per cent – well into “correction” territory (a fall of 10 per cent or more) and its worst performance since the height of the global financial panic of October 2008.

No sector or specialist area has been immune. Travel and leisure stocks have been worst hit, with TUI plunging 30 per cent and easyjet down 27 per cent. Hundreds of funds have slumped to double-digit weekly losses on fears that the spread of the coronavirus would severely disrupt global trade and growth.

According to Morningstar data, some 350 funds open to UK investors suffered a loss of 10 per cent or more over the week to Thursday – that is, not including the impact of renewed stock market falls at the end of the week.

So much for diversification – the timeless, standard advice offered to private investors anxious to avoid the worst of market downturns. It has provided little shelter on this occasion. The sell-off has been indiscriminate, with the hardest-hit funds in varying sectors and geographies and employing different approaches.

US funds have broadly fared the worst. Technology funds and those with a heavy growth focus have tumbled but so too have recovery, special situations and value funds. Funds specialising in the oil and energy sector took a pasting. Only funds investing in perceived safe havens, such as government bonds and gold, provided any shelter.

However, it is the vehemence and the indiscriminate nature of the market plunge that could offer the best prospect of a V-shaped recovery in due course as government action and quarantine restrictions work to slow the spread of the coronavirus. The low mortality rate to date may also work in time to calm the immediate panic that has swept worldwide. For the moment the very spread of preventive measures at airports and public places may ironically be working to fuel public apprehension.

The global financial crisis of 2008-9 brought a hurricane of doomsday predictions – mass unemployment, civil panic and “the end of capitalism”. But traumatic as it was, and financially devastating for the banking sector and those invested in it, the worst of these dire predictions was avoided. The fall last week was the worst since October 2008, when the market fell 21 per cent. But, far from being followed by economic Armageddon, it went on to hit all-time highs.

Similarly, in autumn 2015, the FTSE 100 suffered a fall of 15 per cent since its all-time high in April of that year. While the current rout was initially confined to commodity and mining stocks, hit by the slowdown in China, the slump became more widespread.

Yet fears of a global recession proved misplaced and a recovery set in. The coronavirus epidemic looks set to prove a different order of magnitude: fears of the unknown (or the unquantifiable) and a tendency to assume the worst are common to all major market setbacks. As we come to know more about this virus and its behaviour, the greater the prospects for a more measured response.

But there are signs that this sell-off has been fuelled by other concerns, for which the coronavirus has acted as a trigger. There have been worries for months that share prices here and around the world were unsustainable, with all-time highs sustained by ultra-loose central bank monetary policy and rock-bottom interest rates rather than underlying productivity growth.

A host of value, recovery and special situations funds performed poorly. Funds focused on technology and growth stocks were hit hard. The £842 million Baillie Gifford Global Discovery fund suffered a fall of 9.5 per cent while the Edinburgh group’s £8 billion Scottish Mortgage investment trust slumped to the bottom of the FTSE 100.

The UK’S largest fund, the £19.3 billion Fundsmith Equity, fell 7.4 per cent as manager Terry Smith sought to reassure investors he was “pretty relaxed” about the impact of the coronavirus on his strategy.

Bright spots were few. The £767 million Allianz Strategic Bond fund was among the best performers, while the £888 million Ruffer Gold fund rose 2.7 per cent as investors flocked to bullion – the traditional haven of safety. But elsewhere investors could be excused a reluctance not to look until the fall levels out – as it will.

Two factors will come into play in the coming weeks. One is opportunistic bargain hunting by the brave. But the second is more pervasive and telling: the attractions of higher dividend yields on offer as prices have plunged – all the more attractive as rates on bank accounts and fixed interest savings have been further reduced to near zero. Dividends are the saving grace for many shares.