The pandemic has inflicted enormous human costs right across the globe. The worldwide response, which has involved governments imposing a range of lockdown measures, will inevitably have a huge impact on global economic activity.

Contraction across Europe

The release of first quarter GDP data provided a foretaste of the economic damage the pandemic is set to wreak. In the UK, for example, output fell by 2% across the first three months of 2020, with the economy shrinking by a staggering 5.8% in March alone.

Data for the 19-country Eurozone showed an even larger decline, with output across the bloc falling by a record 3.8% in the January– March period. France and Italy both plunged into recession, with quarterly contractions of 5.8% and4.7%, respectively, while the German economy also slipped into recession with first quarter GDP down 2.2%.

US and Japan economies shrinking According to preliminary estimates, the US economy shrank at an annualised rate of 4.8% in the first quarter, ending a record streak of expansion stretching back to 2014. And the Japanese economy, which was already struggling following a sales tax hike last October, also fell, contracting at an annualised rate of 3.4% in the opening three months of 2020.

China’s economy also reeling

The growth rate in China fell sharply as well, with the world’s second-largest economy shrinking at an annualised rate of 6.8% during the first quarter. The Chinese authorities have now abandoned setting a growth target, which may be an acknowledgement of the challenges facing its struggling economy amid heightened international hostilities due to the COVID-19 fallout.

‘Sharpest downturn since 1930s’

Continuing uncertainties surrounding the future spread of COVID-19 and the likelihood of developing a successful vaccine obviously make it difficult to predict the future path of the global economy. However, the International Monetary Fund’s latest assessment suggests we are facing the steepest economic downturn since the Great Depression.

Potential rebound?

While the IMF has stressed that its predictions are marked by ‘a higher- than-usual degree of uncertainty’, it is forecasting a rebound next year with the global economy expected to grow at a rate of 5.4% as activity normalises. However, if a second outbreak did occur, that could effectively keep the world in recession for a second consecutive year.”

Source: IMF, 2020

Almost exactly 50 years ago, a company few people had previously heard of was hitting the headlines as the price of its shares went stratospheric. A few months later it came back to earth with a crash. Fortunes were made and lost after mining company Poseidon announced the discovery of new nickel ore reserves in Western Australia just as world nickel prices hit a new high.

Poseidon misadventure
Poseidon shares had been trading at A$0.80 in the second half of 1969 when they took off. The price climbed relentlessly for weeks as investors claimed their piece of the action. One day in February 1970, the shares touched A$280.00. Then the profit-taking began and the share price crashed. Nickel prices later dropped back and the Poseidon nickel ore was low quality; receivership ensued in 1974.

Fast-forward 20 years and a new ‘rising star’ of the stock market burned out. A minor fashion house called Polly Peck had been acquired by new owners in 1980 and used as a vehicle for ventures in Northern Cyprus.
A series of deals in the 1980s brought such growth that the company’s shares entered the FTSE 100. In September 1990, Polly Peck shares were suspended amid fraud allegations.

FOMO frenzy – 300 years ago!
The loss suffered by many investors in Poseidon or Polly Peck was a painful lesson about impossible returns and concentration of risk. There had been plenty of previous warnings, right back to the South Sea Bubble in 1720, about blindly following the herd in a FOMO frenzy. Speculative investment has always had particular risk attached and that is all the greater if it is not diversified.

The value of diversifying your portfolio with collective investments

As a general principle, any investment in shares needs to be spread around, so that if one share price slumps badly it only affects a proportion of your overall portfolio. For many investors, a sound way to achieve a spread of risk is through collective investment schemes with risk profiles aligned to suit their needs. We can advise on the investment strategies and products most
appropriate for your objectives and needs.

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Speculative investment has always had particular risk attached and that is all the greater if it is not diversified

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