Slashed oil prices exacerbates COVID-19 share market jitters
Recent share market volatility can cause worry and fear and it is easy to move to a state of panic and want to try to stop your balance dropping by withdrawing from shares and move money to cash.
The analogy I often use in these circumstances is to compare the drop in share market value to the drop in value of an investment property. If you saw the property market drop would you sell that property, then wait for house prices to increase before purchasing another? The answer is quite simply, No. The reason being, the property market always eventually goes back up, just like the share market. Selling now means you never get the opportunity to get your money back.
What started the selloff in global share markets:
- COVID-19 (Coronavirus) was discovered in China late last year. For most people it will give them cold like symptoms, but for the elderly or those with underlying - health issues, it can be more severe. It is now spreading around the world and governments are trying to get it under control.
- As towns and cities in China lock down in an attempt to stop the virus spreading, factories stop manufacturing goods and ships and planes stop transporting them. This causes economic growth to slow. As businesses make less money, their share prices go down.
- Tourism in Australia was earlier hit by the bushfires, our agricultural sector has been hurt by drought; and now tourism and education sectors are being affected again by COVID-19 as people reduce the amount of overseas travel.
- Airlines, travel agents, the tourism industry as a whole and universities make less money and the economic impact is felt across Australia.
What made it worse in the recent days:
- Oil prices were slashed over the past weekend. The Saudi decision to cut prices by nearly 10% on Saturday was a dramatic move in retaliation for Russia’s refusal on Friday to join the Organisation of the Petroleum Exporting Countries (OPEC) in a large production cut in response to reduced demand caused by COVID-19.
- Shares prices in US energy companies were the worst hit.
What happens next?
- It is hoped that Saudi Arabia cutting prices is a tactic to get Russia to come back to the negotiating table at OPEC. The small silver lining to the decrease in oil prices is that we should see petrol prices drop at the bowsers in Australia.
- The Prime Minister is expected to announce an economic rescue package aimed at pumping more money and stimulus back into the economy.
- US interest rates will probably be cut further to stimulate the US economy. Any boost to the US economy is often felt around the world benefitting all of us.
- On a positive note, the weaker Australian dollar makes Australian exports more competitive and assists our agricultural sectors.
- Shane Oliver, Chief Economist – AMP Capital, believes that we will see the Australian economy contract in the next quarter but expects to see a recovery in the first quarter in the new financial year (by September 2020).
I always make a point of telling clients that investing will see highs and lows, and it is the long-term average we are most interested in and less so the year-to-year results. It is tempting to think at times like this that share markets will never recover. They always do.