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How will coronavirus affect investors?

While the human tragedy of the coronavirus outbreak can’t be overstated, investors should be more cautious when assessing the likely impact.

3 min read

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The outbreak of coronavirus has triggered a concerted global effort to contain its spread. Domestic and international travel to China is restricted, expats are being repatriated, and patients are being treated in quarantine.

The emergence of a new potent virus is naturally concerning but our stance for now is one of calm observation rather than panic.

 

What we know so far

Coronavirus is a flu-like illness – not dissimilar to the SARS virus of 2003 that claimed 800 lives – that was first reported in the Chinese city of Wuhan on 31 December 2019, with the first death recorded on 11 January.

Whilst it is known to spread faster than SARS, it is less virulent. For comparison, SARS killed 10% of those infected but coronavirus is believed to have killed c.2-3% of those people unlucky enough to have caught it.

As investors, we’re not qualified to draw conclusions about how it might spread further. We do, however, have a responsibility to our clients to consider the economic impact, and any effect it may have on portfolios and funds.

 

Staying calm and avoiding panic

The negative short-term market reaction that we’ve seen is not surprising given the level of disruption caused by the crisis. Wuhan, a city of 11 million people, has been quarantined and large parts of China are effectively in a state of lock-down.

That said, the consensus at this stage seems to be that the epidemic is containable.  Analysis from Standard & Poor’s has suggested that diagnoses are likely to peak in April, at which time we could begin see a sustained recovery. However this is by no means certain and the crisis could continue after – or indeed subside before – this date.

Meanwhile, market fundamentals remain strong, suggesting equities should recover when the crisis is resolved. Any market falls should also be seen in the context of a very strong 2019 – the S&P 500 was up over 30%, for example.

With prices already elevated, lower equity prices provide a good jumping-in point and we are staying alert for potential opportunities.

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Impact on global growth

The extreme measures so-far taken by Chinese authorities to contain the virus, are likely to act as a drag on consumer demand in the Chinese economy, and could have wider-reaching implications given the connected nature of global markets today.

China generates c.17% of global GDP (vs. only 4% when SARS broke), with emerging Asia contributing around 40%. Any fall in China’s consumer spending is potentially bad for global growth.

The impact over the full year could be alleviated to a degree if China experiences a subsequent economic recovery, but as a result of the outbreak some commentators are pointing to a 0.25% detraction on global GDP growth for 2020.

 

The lessons of previous outbreaks

Many are looking to the SARS outbreak of 2003 to guide their thinking, and there are potentially lessons to be drawn. SARS turned out to have a relatively small negative impact on Asian growth and nearly no impact on developed countries. We also saw markets rebound strongly the moment that the incidence of new cases was deemed to have peaked.

 

Looking to central banks for support

Our analysis of global economic data suggests that the global economy is in a recovery phase after having slowed since the summer of 2018. But what happens in the coming months could have an impact.

We have previously said that central bank policy will be one of the biggest influences on global growth this year, and how the People’s Bank of China reacts to the current crisis could be significant. We’ve already seen monetary policy stimulus this week. Further options could include subsidies for affected regions or industries, and tax cuts to stimulate consumer demand.

We will continue to monitor updates from governments and healthcare authorities.

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up and you may not recover the amount of your original investment.

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