Republished from our US website.
Can Past Pandemics Guide Investors Through Coronavirus?
The Wuhan coronavirus outbreak began with 50 known cases in mainland China in December. It’s since resulted in over 78,000 known cases—2,120 fatal—across over 27 countries, with 14 known cases in the United States as of this writing. The US government has imposed a ban on foreign nationals traveling from China, a move that China’s foreign ministry has slammed as “fear and overreaction.” But with the number of cases rising by the day and the word pandemic dominating headlines, caution seems prudent at this point.
For their part, investors are growing fearful of the implications this rapidly spreading disease may have on global growth and ultimately the financial markets. Worldwide pandemic fears led the Dow to open 1,000 points lower on Monday, while the VIX, which measures global market volatility, rose 40%. Let’s take a closer look at the outbreak and how it may guide your investing strategy.
What does the coronavirus mean for equities?
Investors are no doubt thinking back to previous pandemics like SARS, which spread to more than 8,000 patients over a nine-month period before being vanquished in 2003. While markets were jumpy at the beginning of the SARS outbreak, the ultimate economic effects were minimal. Growth in China dipped briefly and then rebounded; the impact on the rest of the world was negligible. But that was in 2003, when China accounted for 4% of global growth. That number has since increased to 16%. For that matter, coronavirus infections and fatalities have far surpassed those of SARS. One epidemic may not hold as many lessons for another epidemic as investors would like to believe.
MSCI ACWI® performance during the SARS epidemic
Source: MSCI, 2/13/2020. For illustrative purposes only. Not a recommendation to buy or sell any security. It is not possible to invest directly in an index.
It’s difficult to predict at this point whether the coronavirus will create the global economic slowdown that the IMF fears. But it’s already disrupting supply chains around the world. Wuhan is the capital of Hubei province, a top global auto manufacturing hub. General Motors, Volkswagen, and Toyota have been forced to shut down their local factories while the city of 11 million remains locked down. Hyundai has become the first automaker to halt production outside China because of the virus; critical components built in Wuhan can’t get through to the company’s South Korea plants.
And this isn’t a problem just for automakers. Sourcing new facilities and parts at cost-competitive levels will prove challenging for any company operating in Wuhan. Companies as diverse as Airbus, Siemens, Apple, and Ericsson have been forced to delay product deliveries and set up crisis-management teams. Apple announced last week that it wouldn’t meet current quarter revenue projections; the outbreak has kept shoppers away from electronics stores and forced the company’s Chinese facilities to cut iPhone production.
What does the coronavirus mean for fixed income?
Past pandemics have followed a pattern of emergence, peak, and wane. Uncertainty of the timing and scope of the peak tends to promote risk-off behavior. This time is no different. Since reports of a sharp rise in cases in China on January 20, the 10-year Treasury yield has fallen from 1.82% to 1.58%, despite economic data indicating that the long US economic expansion will continue.
Concerned that the virus will slow the global economy, investors may be looking for central banks to step in. According to the CME FedWatch Tool, futures are predicting a 25 bps rate cut from the Federal Reserve by Q3 2020. Fed chairman Jerome Powell says to expect some economic effects in the US but adds that it’s too early to say if they’ll be persistent or material.
How should investors deal with the coronavirus epidemic?
It’s also vital to remember how early we are into the coronavirus event. Even as nations take action to keep the virus out, most experts expect the number of cases to increase, including outside of China in countries like the US. Anxiety will likely remain high as epidemiologists work to develop a vaccine and more information becomes known in the coming weeks. Both known and unknown unknowns are numerous.
It’s always important to prevent heightened emotions from driving investment decisions. Sticking to long-term objectives and maintaining healthy levels of geographic and sector diversification in your equity allocation are principles worth keeping. As China has grown into the world’s second-largest economy, its position in emerging markets benchmark indexes has become more concentrated. Diversification helps investors avert concentration of risk; the fallout of the coronavirus brings this benefit into sharp focus.
The bottom line
We can’t know just yet what the world will look like after the worst of the coronavirus outbreak has passed. What we can do is recommend that investors adopt the disciplined and diversified approach that we bring to our own portfolio decisions. Even in the face of a health crisis, disciplined investors can keep their portfolios in good shape.