An update amidst COVID-19

As a business, we are taking precautionary measures to address health & safety, whilst drawing up contingency plans to be prepared for all scenarios. However, whilst the pandemic is hugely impacting health globally, it's hard to ignore the economic impact too. 

You will have heard that the FTSE 100 collapsed after the index lost £59bn on Friday following a £200bn loss the previous week. Today’s sell-off was fuelled by coronavirus-induced panic in Europe last weekend. We understand that when you are seeing this, it’s easy to be in a state of panic. We are here to try and address that fear.

Some of you have met Lothar Mentel, Chief Investment Officer of one of our investment partners at Tatton Investments.  Some of our clients spent time with Lothar following an event last year. Those that have will agree how open and pragmatic he is, which is why we were keen to share his views on the impact this is having on markets. Below are some of the questions that were asked and Lothar’s views of what we are experiencing.

 

How are markets reacting to the COVID-19 Virus?

Global equity markets have taken a significant hit this week, as investors started to take news of COVID-19 spreading beyond China to the rest of the world more seriously. We thought it would be a good time to consider the historical impact of previous pandemics on global investment markets, as well as assessing some of the likely outcomes we can expect this time round. 

The chart below (from Alpine Macro and Charles Schwab) shows that when those episodes occurred in relation to global equity market returns. 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.

 

Graph outlining market events from world epidemics to global stock market performances.

Make no mistake, those threats listed 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.

So what’s different this time?

In comparison to those flu-type outbreaks, the news coverage and the extent of preventative action from governments have been of a different order. Indeed, it is the preventative action that mostly affects economies and financial markets. Global manufacturing supply chains have been affected by much of China’s extended lay-off since the beginning of the year. That said, the clearest global impact of the COVID-19 outbreak so far has been on travel and events. The Six Nations Championship rugby match between Italy and Ireland (due to be played in Dublin on 7 March) is expected to be postponed, while several Serie A football matches in Italy are likely to be played behind closed doors. Conferences a month from now, especially those involving international participation, have been cancelled. There are even questions being asked as to how the Tokyo Olympics in August might be affected.

How are businesses reacting?

Companies are revising down expectations, and investors expect policymakers to show their hand.

The revenues and profits of many companies will be lower in the coming months. Today, Diageo has warned investors that revenues will be lower than expected for this fiscal year, a decrease of about 1-2%.

Some highly-leveraged companies are particularly vulnerable. The most obvious ones are in the logistics, travel and airlines industries. Energy and resource companies, which were stressed by slow global growth before the outbreak began, are facing even higher financing costs.

However, while bank share prices have fallen slightly more than the overall markets, they are not yet signalling fears of a systemic credit issue. Indeed, government bond yields have experienced a sharp fall, accompanied by a growing expectation of interest rate cuts and monetary intervention from central banks. Institutional investors now see a high likelihood that US rates will be cut by 0.25% within two months.

The probability of policy action to offset economic weakness is likely to support markets in the short-term and potentially provide fuel for a sharp bounce in future activity, most likely in the second half of 2020. That, in turn, should see company earnings expectations return to the levels that were expected a few weeks ago, and perhaps surpass th

What are the reasons to remain calm and stay positive?

Yes, COVID-19 is worryingly contagious. However, 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.

Summary: we still see a case for positive returns in 2020

This bout of volatility will take some time to pass, and further stock market falls are certainly possible, even likely given the nature of the news flow. However, there is 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.

We will always 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. What is certain is that when this crisis is blown over (and we have every reason to assume it will), 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.

Hopefully you find this update useful and it has put some context around what we are currently seeing in markets. As always, if you have any further questions then please do not hesitate to get in touch.

* Please note that the above are views of our own and those stated and they should not be taken as formal advice.