Coronavirus COVID-19 and Oil Price Fall

10th March 2020

Over the weekend we have seen a large part of Italy quarantined in response to a sharp rise in reported Coronavirus cases. It is now expected that many western countries will adopt similar action with bans on all but essential travel and gatherings which will impact on the economy. In contrast to the headline grabbing stories, we have also seen a slowdown in cases reported in China and South Korea, two of the most severely affected countries to date.

Against this backdrop, a meeting of the world’s major oil producers was widely expected to result in a production cut in order to support oil prices. However, a dispute between Saudi Arabia and Russia has resulted in an increase in oil production and a fall of about 20% in the oil price. This has led to further falls in already fragile stock markets around the world as investors worry about the profitability of oil companies, particularly shale gas producers in the US. The UK market, with relatively high energy and materials content, initially opened down over 8% but has since risen although it remains below Friday’s closing price. Normally, a fall in the oil price would be regarded as a positive for the global economy but the magnitude of the decline has frayed trades nerves further.

When we reach maximum negative news the lesson from history is it is time to buy not sell. We cannot be sure we are at that point yet but with interest rates this low, even if earnings fall, equities will eventually find buyers. The catalyst to support equities is likely to come from government and central bank action to steady markets in the days to come. We have already seen the US cut interest rates by 0.5% and a cut in the UK also appears to be on the cards now and we may also see some support from the forthcoming budget.

Past performance is not a guide to future returns. Investments and the income from them can fall as well as rise and investors may get back less than they originally invested.