As the coronavirus outbreak edges closer to being labelled a pandemic, stock markets across the world are reeling as investors back-pedal to reduce their losses.
Recent volatility across the world’s stock markets has thrown many investors into panic. As coronavirus continues to spread across the globe, with infections now reported in 86 countries, the impact on the international economy has been severe.
On Friday, US markets declared their worst week last week since the financial crash of 2008. The three main US indexes ended the week down 10% or more from the previous week. The situation wasn’t much better elsewhere, as European markets also fell dramatically, along with London’s FTSE 100.
Aside from this, economists predict further disrupted supply chains and a decline in consumer demand. This could cause a serious ongoing impact in many countries. Some major businesses, such as Goldman Sachs, Apple and Microsoft, have said the outbreak will affect their profits.
On a more direct level, the tourism industry has seen a catastrophic fall in some areas. UK-based regional airline Flybe has announced its demise. British Airways and Ryanair have already cancelled hundreds of flights, with more expected to follow. With many areas on lockdown, hotels, holiday resorts and cruise liners could all suffer.
The volatility of the stock markets
While the threat of coronavirus is real, on a human level, stock markets are famously volatile. Even expected events like the US presidential election and ongoing global developments can cause a swing at any time.
A major worldwide health crisis such as this one only creates more ambiguity that the markets are not prepared to deal with. This is the view of Julian Emanuel, chief equity and derivatives strategist at BTIG.
“The virus just adds this extra layer of uncertainty that both the bond market and the commodity market were telegraphing weeks before the stock market topped,” he commented.
He points out that major peaks and troughs in the stock markets are “emotionally and intellectually wearing to traders and investors”.
Yet for investors deciding where to put their money, most understand that stock markets are fickle by nature.
Investors look for safe havens
More people globally invest in the stock market than in more stable vehicles such as property. Real estate tends to require a larger amount of capital in the beginning, can be more difficult to liquidate, and may be seen as a more “hands-on” investment.
However, what’s happened recently in the stock markets demonstrates how market volatility can create a high risk environment. Investor sentiment can heavily influence the market, including fear and short-term expectations.
According to Brian Belski, chief investment strategist at BMO Capital Markets, panic and fear are not winning investment strategies to combat recent volatility stemming from coronavirus.
“We think that fear is clearly an epidemic. This has gripped financial markets since 2001 and escalated in 2008. That’s really defined how people trade, especially on the institutional side.”
Avoid the volatility with long-term gains
Over the past 20 years, real estate investment has outperformed the stock market by around two to one. This means that investors who backed property investment 20 years ago have stood to make significantly better gains. It also indicates the long-term nature of success in investment, which is a key component of property investment strategy.
While some investors will always opt for stock markets, property holds a number of major benefits. For one, large amounts of leverage are available in the housing market. This is because it is a tangible, bricks and mortar asset that lends itself to this. It means that investors are often able to diversify their assets, not putting all their cash in one place.
Property investment can also provide a consistent, predictable and passive rental income, with even fully hands-off options available. This is in contrast to stock markets, which can also provide regular returns but with the potential for wide fluctuations.
Return on investment comes through not only the rental yields, but also any capital appreciation over time. Successful property investment therefore requires thorough research in order to find the best location and asset available. But with the right investment choice, the outcome is unlikely to see the same major ups and downs that we see in the stock markets.
Case study
Over the past 15 years, London house prices have inflated by an estimated 606%. The average home in the capital cost just £107,639 in January 1995; in December 2019, this figure was around £760,000. This is according to data from home.co.uk.
In more recent years, the north-west has outperformed the capital. Manchester in particular has seen house prices rise more than anywhere else in the UK over the past six years. Forecasts also show that house prices in the city could rise by 57% by the end of 2028.
To conclude, the uncertainty surrounding the spread of coronavirus and its impact on the world’s economy is unlikely to resolve any time soon. As each day brings new cases, new advice and new reactions in the global markets, many panicked investors will be looking to liquidate their assets in favour of a more stable environment. For those in search of an alternative, the UK housing market could provide a safe haven to ride out the storm.
