Coronavirus: Investment Update

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We’re sure you’ve seen the news headlines this week around Coronavirus.

Up until now, the focus has predominantly been on the health concerns – as it should be. However this changed later this week when the U.S share market dipped 3.5% in one day. The biggest dip in a number of years.

The U.S share market often provides a leading indicator for the Australian share market. So, as you could expect, the next day, the Australian share market dipped too.

Since then the Australian share market has had the second worst week in it’s history…

Now, most developed countries around the world are down about 10% on their previous highs over a week ago.

What is becoming clear is that on top of the human cost, the virus looks set to cause a significant economic cost around the globe as well, with many companies (particularly travel-related companies) falling significantly.

From disruption of supply chains, to cancellation of travel, to a simple lack of consumer and business confidence that influences spending and investment decisions – we are already seeing warnings from companies that the flow-on effects of the virus are beginning to impact on their profits.

While the exact extent of the economic impact is impossible to estimate at this point, what we can say with a fair degree of confidence is that the duration of the impact is likely to be fairly short.

Analysis of previous pandemics such as the SARS outbreak in 2003, suggests an average duration of around 4 to 6 months, after which economic activity tends to rebound quickly.

Even if the impact of the Corona Virus is significantly more drawn out than previous pandemics, it seems highly likely that the economic impact will be largely, or entirely felt in the 2020 financial year, with conditions normalising in 2021, or perhaps even bouncing back more strongly as pent up demand is released.

Why has it happened?

Up until the end of last week, equity investors had largely ignored the Coronavirus on the basis that:

  1. The significant Chinese response in dealing with the spread of the virus (some 500m people and some 100m students stuck at home) had been enough
  2. The decline in the reported number of new cases and deaths, which would point to a peak in the virus occurring over the next week or so
  3. The significant response by the Chinese authorities on the fiscal and monetary stimulus front
  4. The understanding that economic growth and corporate earnings in the short term would be hit, but that this would be rather temporary in light of a better than expected 4th quarter reporting season from corporates.
  5. That governments and central banks both locally and globally would provide stimulus if required.

That was all forgotten over the weekend as we saw a sharp rise in reported Coronavirus cases in South Korea, Iran, and Italy, largely due to lax preparedness and protocols from those countries or the complacency that China had already contained it.

This has resulted in the use and reference of words like “pandemic” based on the technical definition of disease existing on more than 2 continents. News headlines have done a spectacular job at making sure that the word pandemic is fixed in our short term memory for now.

What do we know?

At the time of writing, we know the following:

From a non-medical perspective, we know that local and global economic growth will take a hit in the short term as will corporate earnings in light of the response from governments and corporates to shut down cities and ports, restrict travel, and enact significant quarantine protocols.

Is the market reaction this week an overreaction or is there more to come?

It’s hard to say.

Considering markets paid little to not attention to the virus until this weekend, you could argue that the virus is a lot worse than we think/know and that the falls this week were necessary to temper the gains in the market since in the beginning of 2020.

In contrast, you could argue that the sell-off this week is a mass overreaction given recent corporate earnings reports had been stronger than expected, and central banks around the world remain ready to provide stimulus.

In the investment world one of the challenges of trading occurs through the method of which a lot of it occurs.

A significant amount of daily trading activity is now done by algorithmic / ETF / quantitative (computer) trading, with only a small proportion done by discretionary traders. This means that the computers are trying to predict what will happen and account for that. They are not actually looking at the fundamentals, which are the quality of the businesses that are located within the markets.

This means that markets tend to be more momentum driven than ever before, both upwards and downwards, which exacerbates the short term peaks and troughs in markets.

Should investors be concerned?

The short answer is no.

You should not be concerned. Especially not for those with an investment horizon longer than 2-3 years.

Underlying conditions still remain very supportive of equity markets pushing higher over the medium term.

There is also plenty of evidence that similar pandemics that have occurred in the past have not directly impacted on global growth over the long term. They become what many seasoned investors refer to as blips – nothing more than a speed bump in the road.

Are there opportunities in all of this?

While we’re not fans of speculation, there appears to be some industries which have been harder hit by economic concerns from investors than what could be anticipated. While some of this concern is appropriate, as it considers the disruption to regular business, some of the hype seems to have gone a little bit further than one would expect. As the saying goes, “Be fearful when others are greedy and greedy when others are fearful”.

Some of these industries where opportunity may be include; technology companies who rely on China to produce their goods, travel companies who have been affected by the closure of airports (also airport stocks) and Luxury stocks as China is now a major purchaser of luxury products.

What should I do?

On the health front, we can’t stress the importance of personal hygiene. Take care of yourself and the others around you.

  1. If already invested in markets – stay the course. Crystallising a loss of more than 8% in the short term never makes sense. Use the opportunity to assess your current portfolio to see if it still meets your objectives and to assess whether you’re sufficiently diversified or not.
  2. If not invested in markets but thinking about investing – swift sell-offs like this week can provide a good opportunity to deploy cash to get into markets at lower values. However, this decision is largely a function of your risk tolerance and your time horizon.
  3. Read less of the sensationalist headlines and stories that “news sources” profit from.

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