The slump in oil price last week jolted markets, which were already shaken by the coronavirus pandemic, and hit, unsurprisingly, the energy sector the worst.
Anthony Willis, investment manager at BMO Global Asset Management, said that the oil price fell as much as 33% during the session after the collapse of the Opec+ talks on 6 March.
This pushed stock markets into freefall on Black Monday (9th), Black Thursday (12th) as well as 16 March – which, so far, seems to have escaped being labeled ‘black’.
The Dow Jones dropped by more than 2,000 points on the first two black days, with the steepest decline of 2,997.1 points recorded on 16 March.
Worst hit equity funds
“In equities, the whole energy sector was impacted, with oil majors such as BP and Shell in the UK down over 20% at one stage, and smaller cap companies fared even worse,” he remarked.
Paul O’Connor, head of multi-asset at Janus Henderson Investors, commented: “The plunge in oil prices added a new impulse of volatility and uncertainty to already-fragile markets, initiating a more urgent and broader de-risking.
“The mood shifted to panic as investors found themselves rushing for the same exits at the same time, triggering a self-reinforcing spiral of surging volatility and frantic position liquidation in most major assets.”
Worst hit in equities in Europe were energy funds, which saw their total return plummet to as low as -58.4% for equity ETFs and -62.03% for equity funds year to date (see charts below). The data, sourced from Morningstar, reaches up to 12 March and does not include the crash on 16 March.
Willis explained: “The last sustained oil price decline in 2014 was seen as a positive boost for the global economy. In the longer term, oil importing countries and regions, such as Japan and Europe, will stand to benefit from the lower prices, but the benefit appears small in contrast with the economic shock from efforts to contain the coronavirus.”
He added that “we still think that this period of volatility is not over and we are likely to see further market pullbacks, as investors attempt to re-price assets in the aftermath of a significant shock”.
“Stability in financial markets still seems some way away – signs of the virus easing are needed first as well as markets finding a level in equities and bonds where buyers emerge,” Willis said.
O’Connor agreed, saying that “the missing fundamental ingredient for a sustainable recovery in risk appetite is some evidence that the growth of global covid-19 infection rates is peaking”.
However, he highlights investment opportunities that will emerge, especially for longer-term investors.
“With so much pessimism now embedded in asset prices, we believe that gradually rebuilding market exposures into dips will be rewarded in all but the most adverse coronavirus outcomes.
“History tells us that shakeouts of leveraged positions in financial markets often create attractive opportunities for investors with longer time horizons,” he suggested.