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.