Experts call for automated breaks in UK stockmarket as FTSE plunges 10% in one day

Global stockmarkets have plummeted over recent weeks as fears surrounding the coronavirus outbreak have intensified.

On Tuesday 11 March, the World Health Organisation officially labelled the virus a pandemic.

Over the course of the following day, the US's S&P 500 index plummeted more than 7% within minutes of trading, triggering an automated circuit-breaker for the second time this week.

Across the Atlantic, the UK's blue-chip index's 10% fall means it has plummeted more than 30% below its 52-week high, well into the 20% loss territory of a technical bear market.

Following last week's record-breaking market moves, David Coombs, head of multi-asset investments at Rathbones Unit Trust Management, has called for the UK market to follow the US's lead and install automated breakers to prevent "irrational forces pushing markets to extremes and spooking investors", and at a 5% level as opposed to the US's 7% level, given the home market is less liquid.

"Quant traders are becoming increasingly bigger parts of the market, so breaking that momentum for short periods really would be useful. Given the rise of passives, it would be an incredibly healthy thing to do," he said.

"If the market wants to go down, it will go down, but with the speed of trading today, having those ten-to-15 minute breaks would really help to curb these great big emotional moves, which trickle down to the end investor and cause even more panic."

That said, Coombs does not believe the UK stockmarket should shut for prolonged periods of time.

"The alternative is the market shuts for the day. We are nowhere near that stage. If this happens, it will only prolong the economic impact. It would very much be a last resort scenario," he said.

Coombs has been gradually reducing some of the protection on his portfolios by selling some of his options, as well as increasing weightings in high-quality UK equities.

"Markets could be down another 10% tomorrow. But in three years' time, will I be glad I bought today? Yes, I will be," he added.

Darius McDermott, managing director at Chelsea Financial Services, agreed it would be a good idea to install breakers in the UK stockmarket.

"When markets are falling at such great pace, you have to hold your nerve and continue to believe in what you believe in," he said.

"On the Chelsea funds, we have gently been adding into risk as the market has gone down. We are trying to be pragmatic in these difficult times.

"Markets could, and probably will, fall further again. Italy has already shut down and it is becoming more and more likely here.

"This will, of course, be bad for the UK's GDP and for the economy. Markets have now started to catch up to this reality."

Sebastien Galy, senior macro strategist at Nordea, said the installation of breakers on the FTSE 100 would "allow peace and quiet so that supply and demand are better matched".

"The psychological pressure also eases. People do not run for cover and it gives them time to calm down. It will help but it will not change what is fundamentally happening, it will just smooth the process," he said.

Not everybody agrees, however. Fred Mahon, co-manager of the Church House UK Equity Growth fund, believes markets should be left open and has been "adding to core positions today".

"Having market volatility like this gives active managers the opportunity to really make a big difference over the long term," he said.

"Having a market that is allowed to swing between extreme pricing is actually a good environment for investors who tread carefully."

Rory McPherson, head of investment strategy at Punter Southall Wealth, believes there should be a "global standard" when it comes to stockmarket breaks.

"I think you either have the same for everyone or you do not have anything," he said.

"I think it is destabilising and makes it very hard for people to find prices for anything. There should be more of a free market and less intervention in these things, because it creates a sense of panic that is not necessarily there."

Nick Watson, portfolio manager on the multi-asset team at Janus Henderson Investors, said he "understands the argument in giving panicked or rushed investors time to consider their decision making".

However, he added: "In practice, implementing a market break in UK equity markets would not make a material difference to markets. I would be surprised if a 15 minute pause in trading activity changed a well-considered and though out decision of an asset allocator."

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• Topics
• Investment
• World Health Organisation
• US
• S&P
• UK
• David Coombs
• Rathbones Unit Trust Management
• Darius McDermott
• Chelsea Financial Services
• Fred Mahon
• Church House Investments
• Rory McPherson
• Punter Southall Wealth
• coronavirus
• Wuhan coronavirus outbreak
• Covid-19
• FTSE 100
• Volatility
• macro risks