Coronavirus and investment markets

Introduction

Recently there have been renewed concerns over the Wuhan coronavirus outbreak (Covid-19) expanding globally, with investment markets reacting to the possible impacts to economic activity. Here we share some comparisons with previous outbreaks, and some views on the potential investment impacts.

Current situation

Initially detected in Wuhan, China, Covid-19 has now been detected in numerous countries, notably Korea, Italy, Japan, Singapore and Iran. An overview of what the virus is, how it’s tramsmitted, protection measures you can take, and latest reports can be obtained via the World Health Organisation (WHO) website. As at 25 February, 81,109 confirmed cases had been detected, with 78,191 of these in China, and a total of 2,762 deaths worldwide. The WHO reports are indicating a reduction in the rate of new cases in China, but it is the emergence of new cases outside China that has triggered investment markets to fall.

At the time of writing, the US sharemarket is down around 8% over 5 days, and the Australian market 7%.

It is clear that many sectors of the global economy are being affected, notably travel and tourism, but also education, manufacturing and general shipping.

Previous events

Cornaviruses are not new, and previous outbreaks such as SARS (Severe Acute Respiratory Syndrome) in 2003 and MERS (Middle East Respiratory Syndrome) in 2012 both impacted financial markets at the time. SARS for instance took Hong Kong’s Hang Seng sharemarket index down almost 10% over an 8 week period, though these falls were recovered again over 4 weeks once new cases began to fall.

It is impossible to predict the effects of Covid-19 compared to SARS or MERS. Factors include the nature of the virus: it appears Covid-19 is more contagious, but less lethal than SARS. Geography plays a part (China’s economic importance and role in the global supply chain is important), as does the effectiveness of containment and treatment measures, and whether/when a vaccine is developed. So the impact in both human and economic terms will only be known over time.

Implications for investors

Dalton Nicol Reid’s Chief Investment Officer Jamie Nicol notes that these share market falls are on the back of a period of very strong returns, suggesting a correction of some sort was likely in any case. He goes on to point out that although there has been a lack of confidence over the Chinese data, the WHO reports are indicating the rate of new cases is declining there. Due to China’s economic importance now vs 2003, he expects the economic impact to be greater, but he also expects a strong rebound once the risks fade. Nicol commented “Ultimately issues such as this usually present a buying opportunity given they have a temporary impact on the economy which can recover quite quickly once the issue resolves”.

AMP Capital Chief Economist Dr Shane Oliver has put forward a “base case” scenario where the outbreak is contained within “the next month or two”. In this scenario, Dr Oliver expects a period of downside for shares, followed by a rebound as growth recovers and fears subside. However there is a risk of it taking longer, and there are already clear signs that economic activity in China is significantly reduced, and many companies globally are reporting disruption to supply chains or reduced demand. Dr Oliver suggests that Covid-19 could in fact be a prompt for the RBA to reduce interest rates further to counter the economic impact.

In the face of this uncertainty, what is the best course of action for investors? Clearly markets have taken a step backwards based on the expected economic impact and uncertainty over how severe the spread will be. The problem is that it’s very tempting to alter your portfolio in order to side-step the market fall, however from a practical point of view, it’s impossible to know when to get out and when to get back in. So while we know there has been an impact, and quite possibly will be more, history has always shown us that a recovery follows. And in the case of the Cornavirus, the turnaround could potentially be quite sudden, based on either vaccine or falling new-case data. So attempting to time the market movements is often counter-productive.

More information?

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Published : 27 Feb 2020