Investment Implications of the Coronavirus Outbreak
As human beings, we are complacent with the routine but exhibit fear of the unknown/exotic. We may refer to “just having the flu”, when every year, the flu on average kills 36,000 in the United States alone. Broadly speaking, deaths from epidemics are declining, even if news coverage often leaves out this important context.
The outbreak of a new coronavirus strain (Novel Coronavirus or COVID-19 for short) is creating havoc in China and heightened concern across the globe. The World Health Organization (WHO) has officially declared it a health emergency. The death toll in China has been rising, and there are more global cases officially reported than during the SARS epidemic.
Unexpected Shocks & Investment Strategy
Unexpected shocks and volatility in asset prices can provide temptation to trade around news flow and emotion. My investment process is designed to avoid these pitfalls and, instead, focus on my expertise, which centres around economic and market fundamentals. This does not mean that I ignore events like the COVID-19 virus. Instead, I focus on how this event will affect the fundamentals and adjust my portfolio asset allocation accordingly.
Economic Impact And What To Expect
I expect growth to experience an immediate hit in the first quarter of 2020, especially in regions most directly affected by COVID-19, like China. However, I also expect a V-shaped recovery once the episode passes. This catch-up period will likely offset any first-quarter weakness I see.
Furthermore, China’s influence over the world, particularly the Asian region, has dramatically increased over the past two decades. China has a large influence over global supply chains and accounts for an increasing amount of tourism. Any sort of slowdown in China will likely have ripple effects throughout the region.
The Market Impact of COVID-19
I have seen that pandemics can produce volatile market reactions, with a tendency toward a sell-off and quick rebound, almost always offsetting the initial drawdown. I attribute these fierce V-shaped recoveries to the generous monetary and fiscal policies that have typically followed similar events. This is true both at the global level, and, also, at the local level where the episode has the most direct impact.
In my view, the biggest disparity in market impact will likely be regional instead of across the capital structure. Regionally, my preference, from an investment standpoint, would be to focus on markets that have both policy flexibility and are more insulated from the COVID-19 epidemic.
Two such markets are the United States and United Kingdom; both are relatively closed economies in which trade contributes a smaller portion to GDP growth. Additionally, the United States and United Kingdom still can cut interest rates if policymakers need to respond to a growth slowdown.
On the other hand, the Eurozone and Japan are more reliant on trade as a contributor to growth, and policymakers in these regions are also more stretched, with less room to counteract a growth slowdown.
We will go through three phases of the COVID-19 virus. The first phase is rising uncertainty, the second phase will be stabilization and the third phase will be de-escalation. At the moment, we are still in phase one.
Remember, it’s time in the Market that counts, not Market timing! It is still advisable to remain invested and to not panic out of the Stock Market.
I will continue to monitor this situation as it develops and remain nimble within my investment approach to this and other potential market shocks.
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