How Should Investors React to the BoE Rate Cut?

VIDEO: After significant stock market falls and an emergency rate cut by the Bank of England, Morningstar's Dan Kemp says investors should be looking for bargains

Holly Black 11 March, 2020 | 9:33AM
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Holly Black: Welcome to the Morningstar "Market Reaction." I'm Holly Black. With me is Dan Kemp from Morningstar Investment Management. Hello.

Dan Kemp: Hello, Holly.

Black: Well, this has been quite a big week so far, and it's only Wednesday. So, we've had huge falls in the stock market. And now this morning, the Bank of England has done an emergency cut to rates and they're now back down to 0.25%. What's going on?

Kemp: Well, there's lots going on. And I think often in these situations, it's normal to say, just keep calm and carry on. But actually, I'd encourage people to be really excited at this point that we're seeing asset prices get cheaper in the main, we're seeing more opportunities for investors. What we saw from the Bank of England this morning was a little bit more support. We may see some more from the budget later on and other authorities around the world. And so, actually, now is a great time to start bargain hunting.

Black: But this is all in response to the spread of the coronavirus and people are panicking, rightly or not rightly. Is now a really hard time for people to think that rationally and say, okay, I'm going to buy into the stock market instead of running for the hills?

Kemp: Well, it is really difficult. And of course, that's where some of our behavioral biases kick in that we tend to find far more reasons to buy assets when they've gone up in price, and far fewer reasons to buy when they've gone down in price. But of course, in reality, we should be behaving completely differently to that. As assets become cheaper, we should be buying more and as assets become more expensive, we should be buying less or holding less. And the first thing to remember in these situations is to come into them with the right level of risk. We've spoken a lot over the last year about how expensive some asset classes are. And so, we came into this situation carrying a little bit less risk than we normally would. And that's put us in a good situation to buy. Whereas, of course, if you've come into this carrying more risk, then actually you're in a much more difficult situation. So, it does matter where you start it. But nevertheless, investors should be looking for bargains now. Not everything is a bargain, far from it, but should be looking for bargains now, rather than running for the hills.

Black: So, what tinkering are you doing this week? Where are you finding value?

Kemp: Well, the first thing we're doing and the first thing that we'd encourage everyone to do is just to keep rebalancing your portfolio. Now, we know that making any change to a portfolio sometimes comes with costs and so you have to be careful. But when we're seeing the sharp moves that we've seen over the last couple of weeks, what you'll find is that your portfolio is naturally getting out of kilter if you haven't done anything. So, your equity holdings will probably be falling as a proportion of your overall portfolio. And your safe assets – so-called safe assets, bonds and cash, will be rising. And so, what we're doing and what we'd encourage others to do is just think about rebalancing those portfolios back to where you started. That gives you a good foundation for making good long-term decisions. Once you've done that, then you can think about adding more equity exposure, buying more shares, looking amongst all the rubble and the fallout of the last couple of weeks and buying some more very cheap assets. Now, the key thing there is not to over-buy at this point. There's a danger of being whipsawed in these sort of markets. They're not just going down. There's days when they're going up very sharply as well. And so, don't do too much. Don't be too active. But spend time doing deep research and finding some good-quality assets.

Black: And the Bank of England has said, although this might be painful, they hope it should be quite short lived, all this volatility and the stock market falls, and their rate cut is designed to sort of reassure markets. And I think we've seen that this morning, the FTSE is opened up. So, should that help to reassure investors?

Kemp: If I was an investor, I would absolutely encourage people to turn off the news, to not think about what's happening this morning or even last week, or what's going to happen over the next few weeks. That's all entirely unpredictable and random. Really, as investors, we should be thinking 5, 10, maybe even 20 years ahead. And in that context, then it's likely that the economic damage done by corona for most assets will be limited. And so, when you're thinking about that long-term horizon, then you can put it in some sort of context. If you are living moment by moment, reading the news, watching what authorities are doing too closely, then you risk being whipsawed as I said earlier.

Black: Well, thank you so much for your time.

Kemp: Thank you.

Black: And thanks for joining us.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk