We have been of the view that equity markets would remain supported by a reasonable growth backdrop and accommodative policy, as investors had recently viewed the dovish moves by the likes of the US Federal Reserve and the European Central Bank positively, considering the reduction of interest rates as warranting higher valuations on future earnings, despite the increased risks.

The rise and spread of Covid-19, coronavirus, has seen risks increase, and global equities have recently been subject to heightened volatility as investor sentiment fluctuates between optimism around containment and fears of a full-blown global pandemic, following the accelerating rate of new infections outside China and the number of countries seeing new cases. The situation is fast moving and there is no certainty on whether it will become a global pandemic or if the number of cases will stabilise, peak out, and ultimately decline, although many market participants appear to be leaning towards the former outcome. Were this to be the case, economic disruption will extend and spread, increasing recessionary risks and hitting corporate earnings. Indeed, we are already seeing companies, from banks to airlines, releasing negative announcements and cutting earnings guidance in response to the virus. In this scenario it is likely that central banks will ease policy, but this is not a shock that is addressable through monetary action alone; we would expect both monetary and fiscal stimulus were the situation to materially worsen.

At this stage we do not think Covid-19 will tip us into a prolonged marked bear market, although recessionary risks have risen materially and the short-term outlook remains mired in uncertainty. Were there to be an economic downturn, we would not expect it to be overly deep or extended. While not our base case, investors should be prepared for the end of the long bull market. We are still finding plenty of opportunities and remain well placed to withstand the inevitable short-term volatility. We resolutely retain our long-term focus and believe that equity markets will continue to deliver attractive returns for the patient investor.