Markets have taken a negative reaction to increasing concerns about the spread of COVID-19, the coronavirus that originated from Wuhan, China. We have been closely following developments with this virus, especially the knock-on effects to longer term economic growth and the markets. Up until now, the virus has largely been concentrated in China.
However, recently there has been a sharp rise in infections, especially in South Korea, Iran and Italy, that has spread fear in the market about a prolonged disruption to the global economy.
We were aware of the risks of this virus spreading but knew it would take the virus to land at the doorstep of the West before equities would start to take fright. With an increasing number of cases in Italy, and the speed of the rate of infection, but also the virus spreading to other parts of Europe and the United States, investors are beginning to realise that COVID-19 is not just an Asian problem but a significant challenge to the global economy.
Market reaction recently has been decisive. Equities are down, safe havens have rallied. Gold continues its strong run. US Treasuries remain in strong demand from investors.
We suspect that credit markets will see raised volatility as investors fret that lower quality bonds, particularly amongst high yield, could see some stress if global growth dips more markedly.
Financial markets have a tendency to over-react in the short term. Uncertainty creates fear and panic, resulting in knee-jerk reactions, especially after such a long bull market where investors are likely to sell assets to lock-in sizeable gains. There is a lot of uncertainty surrounding this virus.
Health officials still aren’t completely sure of the incubation period. The virus itself doesn’t appear to have mutated. The mortality rate remains around the 2-3% level, and mainly seems to be fatal to those already at risk (e.g. infirm, elderly, infant etc). Whilst official Chinese data suggests a slowdown in the rate of infection, the increase in cases in South Korea, Iran and Italy (where the authorities have been unable to identify the source of the cluster of cases) is a cause for concern.
We are also unsure as to what the policy response is likely to be from governments and whether they have anything in their arsenal to boost economic growth to compensate for any disruption from the virus spreading. The uncertainties listed are not exhaustive and will continue to concern market participants.
As a longer-term investor, it is important to try and look past short-term market noise and consider the longer-term trends and impact. It is particularly important that any investment decisions cannot be implemented immediately. Implementation risk is ever present. We consider longer term views, and the investment managers that we employ use tools based on long time horizons, to help guide asset allocation decisions.
Generally, the investment managers we use have only a small exposure to the Asia Pacific and European equity markets, the two regions currently impacted the most by the virus.
The investment managers we use tend to move quickly should the outlook worsen, if the shorter-term move does signal the start of a longer-term trend.
In order to put some perspective around this we have produced a table to show how world equity markets performed in recent epidemic scares.
Source: Charles Schwab, Fact-set data for 1,2&3-month performance. Dimensional Matrix Book 2019 for That year and 1 year later. The MSCI Index captures large and mid-cap representation across 23 developed markets countries. With 1,646 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation in each country.
What is the impact on your investment portfolio?
With stock markets falling in the last few days there’s no shortage of market “experts” in the media warning of further “turmoil” to come.
But the simple fact is that they just don’t know. Yes, coronavirus could develop into a global pandemic. Or it could blow over in a matter of months. In any event, predicting what impact all the different possible eventualities might have on the economy, let alone the financial markets, is nigh on impossible.
Our advice is don’t try to time the markets as our client portfolios manage risk through holding a different range of asset classes which helps mitigate risk of ‘having all eggs in one basket’
We would not recommend making any significant changes to clients’ investment portfolios and would aim to ride out short term market noise and focus on making rational long-term decisions.
The chart above identifies the major disease outbreaks and although all caused short term market disruption, the impact on long term investment fundamentals was limited and economic growth subsequently resumed.
However if you are anxious about the markets- and it’s a natural human reaction to be so – please feel free to contact us.