Investors and traders are no doubt feeling the pressures of Covid-19.
While the world’s major indices have adjusted to the initial shock posed by the pandemic, markets remain volatile and asset prices are in a state of flux.
Successive supply-driven oil shocks in the past few weeks, for example, have culminated in the Brent crude oil price dropping to a 21-year low.
Will this symbolise the beginning of the end for oil as society shifts to greener, alternative sources of energy that are less susceptible to market shocks?
The sharp fluctuations in the oil market may push investors to choose alternative sources of energy. The other scenario is that the lower oil price makes the commodity more competitively priced than renewable energy assets and, as a result, investors buy more oil and fewer renewables.
Key Points:
- Gold prices have stabilised following losses in March
- Fear that spike in demand for US dollar is unsustainable
- There are opportunities to alter one’s portfolio
During this turbulent period, though, it makes sense for an investor to consider whether a radical restructure of his or her portfolio is required.
For the moment, there is no real end in sight to Covid-19. The longer it goes on, the more profound its long-term impact will be on the major markets.
In times like these, my advice is to always keep a level head.
Amid crises, there are opportunities to be had.
As such, one should not lose sight of their long-term objectives; those managing a portfolio must determine whether they are seeking to minimise immediate losses, take advantage of short-term gains, or simply hold assets that will collectively weather the impact of the virus.
Having watched the performance of different assets in recent weeks, I have a few notable observations to help inform the above decision.
Are any assets really safe?
Anyone with a basic understanding of the financial markets knows that in times of volatility, investors rally to assets that are able to hold their value. This seems simple enough.
Gold and precious metals are popular safe haven destinations due to their tangible qualities and consistent market demand.
Based on this principle, we might therefore assume that investors are now looking to such assets.
In reality, this has not been entirely the case.
For example, the price of gold rose considerably throughout January, only to suffer significant losses in March following a fortnight of intense selling and liquidation measures.
Prices are now stable, but there is always the potential for the price of gold to suffer a second wave of losses in the short to medium term.
There is also the practical question of when to buy gold. A useful tool is the Vix volatility index. By analysing future risk and investor behaviour, the Vix provides a 30-day projection of the expected volatility likely to be experienced by the major markets.
Based on performances in the past, a drop in the Vix should be followed by a rise in gold prices and vice versa. As such, investors considering a gold purchase should watch the performance of the Vix.
US dollar prospects
In the past few months, investors have been rallying to the US dollar, seeing it as a safe haven.
As a result, some commentators are fearful its spike in demand is unsustainable, anticipating the rise in value will lead to a sudden drop amid a host of other pressures.
It is a valid point, but we should not overlook the properties that make the greenback an attractive option for investors in the first place.
The US dollar is the world’s most traded currency and is involved in around 70 per cent of currency transactions.
Its reserve currency status is also advantageous. With oil-linked currencies like the Norwegian krone and Canadian dollar dropping in value as a result of the oil price crash, investors are once again rallying to the US dollar.
The coming weeks will be an eventful period for the American currency, and it is worth taking note of its price fluctuations as markets react to Covid-19 and future fiscal measures introduced by the major governments around the world.
Based on what we have seen so far, the pandemic has not dampened investor demand for the dollar.
Buying while share prices are low
In the 12 months to March 2020, the FTSE 100 fell by 27.3 per cent.
This statistic takes into account the surge in trades that took place following the 2019 general election in December as investors rallied to UK-based assets, as well as the fallout stemming from Covid-19.
The extent of the recent losses would suggest that there are opportunities for investors seeking to take advantage of low prices to buy individual company stocks or index funds.
In this case, the challenge is for investors to find companies that have a high price-to-earnings ratio.
Just because the price of one company stock has dropped in reaction to Covid-19 does not mean it will recover.
It could be the case that the stock was already overvalued and has dropped to a more realistic price.
For investors and traders, the impact of Covid-19 on the financial markets will offer important lessons for future volatile scenarios.
For the moment, at least, there are opportunities to alter one’s portfolio depending what the ultimate objective may be – taking advantage of short-term price movements, minimising loss, or acquiring assets for long-term security and returns.
Giles Coghlan is chief currency analyst at HYCM, an online provider of forex and contracts for difference trading services for both retail and institutional traders
