Coronavirus and its ongoing spread has clearly dominated sentiment and markets over the past few weeks and, beyond the considerable human cost, economists and other ‘experts’ are busy trying to predict the likely economic fallout.
The chart below (from Alpine Macro and Charles Schwab) highlights when those episodes occurred in relation to global equity market returns and the data suggests that past epidemics have not resulted in any significant or long-lasting damage to global stock prices. While certain economies and markets have been negatively impacted for short periods, most of these potential worldwide pandemic threats have proven to be just that – potential.
Clarity around the current situation is not helped when we live in the age of social media and sensationalistic journalism where scare stories spread very quickly. Historically, the economic cost of a virus has been more from the associated fear than the disease itself and the language across much of the press of ‘sweeping pandemics’ can only fuel that.
The threats highlighted in the above chart were severe, with some truly pandemic. According to research from the World Health Organisation (WHO), the 2009 H1N1 Mexican Swine Flu affected up to 1.4 billion people (at least one in five people worldwide were infected), and had a death rate of 0.2% and an ultimate fatality count in excess of 160,000.
The most obvious comparison is with SARS in 2003. The Wuhan Coronavirus actually shares 80% of its genome with SARS. While the death toll for the current outbreak is already higher, the mortality rate is lower: Coronavirus appears to kill between 2-3% of those infected compared with closer to 10% for SARS.
But there are differences between now and 2003. China accounts for around a third of global growth, double the proportion in 2003, and outbound tourism has increased five-fold. Total outbound tourism in 2018 was 150 million individuals, up 14.7% year-on-year.
The lockdown of millions of people in China is unprecedented and is having some economic impact. We will have to wait until the outbreak levels off and starts reducing before experts can fully assess the actual consequences. Rough estimates suggest it will reduce Chinese growth by 2% in Q1 but only about 0.2% for the full year as catch-up activity occurs and offsetting economic stimulus is implemented.
No one should be complacent about any outbreak, particularly one that has already cost more than 2000 lives but we, as advisers and investors, have to focus on the hard financial facts. That typically involves assessing whether any event is relevant or not, investible or not, and if yes to the latter, are we too early or too late to get involved.
Context is everything in this case. China is home to 1.3 billion, or a fifth of the world’s population, and something like nine million of these people die every year. As for the flu, annual epidemics are estimated to result in three to five million cases of severe illness worldwide and as many as 500,000 deaths. The death toll for Coronavirus is concerning but set against these figures, not yet particularly out of the ordinary.
Markets took a hit in February, with the worst week since the 2008 crisis to end a difficult month. As would be expected, we saw the usual accompanying surge in gold as a safe haven, rising around 10% so far this year.
China obviously remains hardest hit as the epicentre of the outbreak and we saw the country’s president Xi Jinping warn the virus would have a “relatively big impact on the economy and society”. He added it would be short-term and controllable however and the government would step up efforts to cushion the blow. Early estimates suggest the outbreak will reduce Chinese growth by 2% in Q1 but only about 0.2% for the full year as catch-up activity occurs and offsetting economic stimulus is implemented – but obviously the longer the situation continues, the greater any impact could eventually prove to be.
Elsewhere, tech companies, whose supply chains have been disrupted, took the brunt of the market drop and this wiped out all the Dow´s and S&P 500´s gains for the year – and we have seen a number of companies reporting lower than expected numbers as either manufacture or demand has suffered.
Having tied himself to stock market success so tightly, President Trump was quick to reassure investors that the US economy remains in good shape and the market was looking attractive. To be fair, we have also seen a number of economists support that view over the month, albeit primarily in an attempt to warn against any short-term overreaction.
As ever, finding an economic consensus is hard but while there are obviously outliers at both extremes, many suggest uncertainty generated by Coronavirus should not distract from the underlying trends in place at the turn of the year, primarily reflation, manufacturing revival, diminishing trade war uncertainty, and tailwinds from fiscal and monetary policies worldwide. If anything, policy support is likely to increase to counter short-term uncertainty, leading to a sharper bounce back later in the year against a backdrop of depressed expectations.
Others have highlighted the disparity between ‘Wall Street and Main street’ – or the market and the consumer for us non-Americans – with data on areas such as consumer spending and housing growing increasingly positive over the last year.
Looking ahead to the US election with his trademark prescience, Trump said the market would jump ‘thousands of thousands of points’ if he wins a second term later this year and a crash ‘like you never have seen before’ in the event of a Democrat victory. Despite the recent drop-off, the market has surged since Trump’s shock win back in 2016 and he is clearly playing up to nervousness on Wall Street about Elizabeth Warren or Bernie Sanders clamping down on the financial sector.
Coronavirus has kept Brexit and trade out of the news for much of February but both continue to bubble along in the background, with chlorinated chicken more of a focal point than most people would wish. Both the UK and Europe have signed off their negotiating mandates ahead of initial trade discussions to begin in March, with the EU urging Boris Johnson to keep his promises. It also confirmed warnings from chief negotiator Michel Barnier that Britain must sign up to a level playing field in any free trade agreement and early fault lines are emerging in some areas, including fishing.
The Government is optimistically hoping to achieve the broad outline of an agreement by June with a goal of finalising a deal by September. But if there has been insufficient progress by June, they would “need to decide whether the UK’s attention should move away from negotiations and focus solely on continuing domestic preparations to exit the transition period in an orderly fashion” – once again, we face a ticking Brexit clock!
On the trade war front, the Phase One deal came into force over the month and we reiterate previous comments: it is enough to reduce short-term uncertainties (although, of course, that has been replaced by Coronavirus concerns) but fails to address more contentious topics. Despite promises from the US, Phase Two discussions look unlikely to make much progress this year due to American elections and diverted focus of the Chinese authorities towards containing Covid-19.
Summary – Remain calm and positive
Yes, COVID-19 is worryingly contagious. People are naturally concerned about health and wellbeing given that there is no certainty over how the virus is spreading.
Most flu-type viruses are seasonal, dissipating through spring in the northern hemisphere. Despite the widening of the infected area in recent weeks, the rate of infection has slowed overall and the WHO has not changed its view that COVID-19 will follow this path, even if it may yet be classed as a pandemic. Action to prevent its spread will continue, and will be a necessary burden on the global economy. Markets may be both hurt and supported by those actions.
China provides a lot of reasons for optimism, having taken those actions. Activity is rebounding across the country already, while infection rates have declined substantially. This positive news has been overwhelmed by cases from other countries, but does suggest that the impacts can and do pass if robust action is taken.
This bout of volatility will take some time to pass, and further stock market falls are certainly possible. However, there remains good medium-to-long-term potential for stocks. Developments may well be positive rather than negative (perhaps the arrival of an effective drug) and trying to time any risk reduction (and increase) threatens to destroy value for investors rather than protect them.
At Nestor, as we continue to work closely with our carefully selected investment managers, we aim to keep abreast of current risks but recognise that long-term investment must mean not over-reacting to them. Selling into a panic is never a good strategy.
Given the clear impact the situation is having, from deserted airports to production lines grinding to a halt, we cannot dismiss this as market noise but, as ever, warn against extrapolating short-term market moves into decisions that affect long-term asset allocation decisions. We are reminded of one of the most highly regarded investors, Warren Buffett who once stated “You can’t predict the market by reading the daily newspaper”. We should all keep this in mind over the coming months, with markets likely to remain volatile in line with headlines and February’s oscillations setting the pattern.
When this crisis is blown over the world economy will be left with plenty of monetary and fiscal stimulus, and much reduced interest rates. The global economy started this year with expectations of positive growth, and we expect that this will still be the case even if it faces a delay.
We are therefore maintaining a watching brief but at the moment see no reason to make any wholesale changes to either our strategic or tactical asset allocation and holdings in funds across our recommended portfolios.
Nestor Investment Committee March 5th 2020
Please remember that past performance is not a guide to future performance and the value of an investment, and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and you may not recover what you invest. Investments should always be considered as longer term. This document should not be construed as advice regarding investment in any product or to buy or sell any investment. The information contained in this article is believed to be accurate at the time of publication.
Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Nestor as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.