With extensive news coverage and some headline-grabbing financial commentators, there is an argument to be made that the coronavirus and the impact of it could push the UK into a recession. Not only this, but some are forecasting a full-blown stock market crash, beyond the fall we have seen over the past few weeks.
A crash does not have a specific percentage fall attached to it. But usually a 10% drop is seen as a correction, whereas a 25% drop is seen as a crash. The timing also changes the definition. If an index loses 25% over 10 years it would not be termed a crash. But if it fell by that amount in a month then it certainly would be!
Regardless of how you define a crash, it is bad news for investors. It means the share price value of your portfolio would drop significantly. But here are three reasons why I do not think 2020 will be the year of a full stock market crash.
P/E ratios are not that high
Price-to-earnings ratios show how investors are valuing a company on the basis of potential future earnings. If you are very positive on the future or a firm, you may happily pay 20 or 30 times current earnings to buy the stock.
The FTSE All Share average P/E ratio sits around 13, which is very comfortable and does not suggest the market is seriously overbought. Even before the correction, for most of 2019 the average P/E sat around 16-18. A historically high number has been anything of 20+. This would indicate the market is expensive and could be due a move lower to compensate.
Interest rates have been cut
Rates are seen as a leading indicator, which means raising or cutting interest rates is seen as a preemptive move to counteract a coming problem for the economy. Yesterday the Bank of England cut interest rates by 0.5%, bringing them down to a low 0.25%. I actually see this as a positive move. This is being done as a protective measure in advance of any serious hit to the economy (and by extension the stock market).
The cut in rates means that companies can borrow funds at a lower rate from the banks. This enables financing for investment or spending in other ways. It should help firms to lower costs. And this should mean a more profitable bottom line (or at least offsetting some of the fall in revenue from the virus disruption).
Good 2019 corporate earnings
A raft of FTSE 100 firms have reported full-year results for 2019 over the past month or so. More often than not they have been positive. For example, I reviewed both Barratt Developments and Admiral Group. I see them as buys due to those good results released recently. Yes, there is potential disruption to be caused by combative measures against the virus. But there are a lot of firms that have strong balance sheet and robust market share. I’m not saying 2020 won’t see earnings take a hit. But firms like these should be in a good position to ride it out.
