The idea of a global epidemic is worrying enough, and we now know that it has hit our shores. But what about your investments?
Global markets have fallen in value in anticipation of “what the virus could mean for the global economy”. As an experienced investor will know, this reactive stance which is driven by fearful sentiment could pose an opportunity for fund managers to “buy the dip” if they feel the market reaction is overdone. Investors are, however, asking the question, “should I be worried and how is it going to affect my investments?”
First, let’s examine the data.
The graph below shows the last 13 epidemics along with the return of the MSCI World Equity Index. The table shows the 13 epidemics and their subsequent one-, three- and six-month returns.
Source: Credo Wealth
When we put the epidemics into perspective, we see that the market may react in the short-term due to fear. However, subsequent global equity returns are driven by factors which seldom have any relation to the epidemic.
The table shows that after three months most of the time global equity markets are back into positive territory. Where there have been exceptions to this, other external factors have kept the markets down, not the epidemic.
The chart below again reiterates how there is an initial reaction from the market at the start of an epidemic and over the subsequent months, the market starts to recover as fears begin to fade.
Source: Boutique Investment Partners
The short video from Corion Capital helps us to put the virus in perspective when compared to other epidemics.
M&G Investments (an offshore arm of Prudential)
“The real-world impacts of the coronavirus are tragic and profound, and today’s investment mood has changed dramatically from the relative comfort of only a month ago. Ultimately, however, the greatest opportunities occur when investors (including ourselves) are at our most fearful, and in that respect, this is an episode that is still developing.”
Foord Asset Management
The market is reacting instead to the expected economic impact of travel restrictions, containment, quarantines and disruption to global supply chains and consumer demand. China’s containment actions were severe, with severe economic consequences. But as infection rates in China begin to peak, economic activity should recover in the months ahead.
So, while Covid-19 will undoubtedly hit global growth this year, in our view there is a low probability of it causing an outright US recession. Nevertheless, a technical recession is still a possibility. The European economy should suffer more given its structural weaknesses. The first confirmed case in South Africa was reported on March 5. With the South African economy already in a technical recession, this is not good news given the additional drag on economic activity that will likely result.
Orbis Asset Management (Offshore arm of Allan Gray)
Outbreaks excel at producing frightening headlines because viruses spread at an exponential rate. If each sick person infects two others, and it takes a week for the virus to incubate, it will take just ten weeks for cases to go from 10 to 10,000. The number of cases, and new cases, will grow rapidly each week. This makes it important to focus on the growth rate rather than just the absolute numbers reported each day. A slowing growth rate can be an encouraging sign.
It is important to keep the coronavirus in perspective. In the US alone, the “normal” seasonal flu infects 30 million people and results in 35,000 deaths in a typical year.
We have no idea how the virus will progress from here. It could fade quickly, or get much worse. Our task is to assess the economic and market impact on individual companies.
Boutique Investment Partners
Markets will remain volatile until there is a slowdown globally in the spread of the coronavirus. News surrounding the virus might paint a gloomier picture for the world economy than should be the case. It is a serious virus, but China was proactive in attempting to contain the virus. Bad news sells. As such, the combination of sensationalist reporting and fake news will create an intoxicating narrative which will probably contribute to market volatility. The rational expectations are that countries will stimulate their economies to jump-start economic growth. Markets tend to recover quickly after the peak of a virus outbreak, judged by previous outbreaks.
Dodge & Cox
Despite the rapid market reactions around the world, a lot is still unknown. It is not clear how government containment measures, seasonality effects, potential virus mutations, or possible mitigation from medical treatment and vaccine developments may affect the spread of the virus. The ultimate extent of disruptions to supply chains, global trade, and tourism patterns is uncertain, as is the potentially self-fulfilling damage that could be caused by market dislocations. While these uncertainties could be resolved in a way that validates the worst of the fears underlying recent market moves, it is also possible that the outcome could be more favourable.
Given what we know so far, our view is that the virus is unlikely to have a persistent impact on returns over our long-term investment horizon. This conclusion is based on our analysis of a variety of probabilistic scenarios. To formulate these, we have relied on information about the resolution of past outbreaks, our expectations around government and economic agent responses to the virus, and the likely reaction of markets to the evolution of the economic outlook over our investment horizon.
36ONE Asset Management
Initially, US markets continued to climb to all-time highs during February, indicative of the complacency among market participants despite a constant trickle of negative coronavirus related news. This complacency was quickly dashed as the number of new coronavirus cases in the rest of the world overtook those in China. Countries are taking extreme measures to stop the spread of the virus, however, this will hurt the global economy. Tourism is the obvious casualty, as people and businesses reconsider their travel plans, but more importantly, consumer spending will be impacted when a large portion of the population is afraid of eating at restaurants and going to shopping malls. Unfortunately, the US response to the virus has been disappointing, which means the number of cases will likely rise exponentially in the next couple of weeks, possibly resulting in a global pandemic.
Markets don’t react well to uncertainty and the coronavirus is, unfortunately, a catalyst which has sparked fear around the world.
The job of asset managers is to assess the economic impact of the virus on the portfolios that they manage. The responsibility of the investor, although daunting is to not panic. Asset managers are in a better position to align their clients’ portfolios in well-researched and appropriate asset allocation.
On the balance of probability, the earnings of global companies could be affected in the first half of the year. This remains unknown. Some companies and sectors could be more affected than others such as the hospitality and tourism sector.
Asset managers will remain vigilant as new reliable information about the virus becomes available.