This article was updated on 24 March – read on for our latest views on what Coronavirus means for investors.
Coronavirus or Covid-19 is firstly a health emergency, and no analysis of its financial effects should minimise the human loss and worry that it is causing.
That fear has spread into financial markets dramatically over the last six weeks, with global stock markets registering substantial losses based on risks around a slowdown in trade and a hit to company earnings in 2020. So it is also important to try and understand the financial effects of Coronavirus.
It’s impossible to ignore the short-term
What a difference a month can make.
Phrases like social distancing, flattening the curve, and lockdown have become our everyday vocabulary. And for the short term at least, these changes will have a real impact on the performance of businesses.
It seems likely that at least half a year’s economic performance will be a write-off. That is one reason asset values are falling
What does the outbreak mean to a long-term investor?
But the basic financial problem is not simply the outlook over the next six months. It’s that investors, analysts and economists aren’t epidemiologists. Right now, the main feeling in financial markets is uncertainty. So while many share valuations have fallen, the main feeling in the markets is volatility.
For example, on Friday 13 March, the US S&P 500 of top companies recorded its largest ever points gain. In fact, the six biggest points gains ever in the S&P 500 have all occurred this month.
This volatility is likely to remain until we have greater clarity on the spread of the disease.
Some indications are that China’s containment measures have been successful in reducing spread of Coronavirus.
But on the other hand, the virus has established itself in Europe, and there are additions to the list of affected countries every day. Ireland recorded its first cases this week.
That makes Coronavirus a very difficult phenomenon for investors to value.
There’s a short-term flight to safety
In the short term, it is resulting in a flight to ‘safe haven’ assets such as gold, the US dollar, and government bonds. At the same time, company shares – particularly those exposed to China, oil, and the travel industry, have suffered as investors sold them off.
For investors in multi-asset portfolios, recent losses in equities will be cushioned by gains in other asset classes.
For pure equity investors, it’s possible that further losses will be recorded as companies digest what Coronavirus means for their 2020 financial performance.
What then for equities?
24 March update: The key question is whether now is a time to exit equities and move into less volatile assets like bonds or gold. For the time being, our view is no.
Clearly investors in company shares are sitting on a material paper loss over the last six weeks.
But the situation is moving quickly. Volatility has characterised the markets, with big rises as well as gains.
Governments and central banks are stepping in. That is supporting recovery in share prices – but it is also likely to mean bank interest rates will stay low for even longer.
The evidence suggests that investors who sell once the sell-off is underway tend to lose value as they also miss out on the recovery when it comes.
So for the time being, our view is that for most medium-term equity investors, it is best to stay the course and remain invested.
Right now, our judgement is that the Covid-19 outbreak could lead markets in one of two directions, based on what happens epidemiologically.
If now turns out to be peak uncertainty, new outbreaks start to be limited (as appears to be the case in China), governments continue to support the economy, and companies and consumers get back to business within a matter of months, then it is about pricing in a one-off event in economic performance, a broadly flat year of growth for 2020, and there will be a recovery in asset prices as other economic stories start to drive market activity.
If the outbreak continues to get worse before it gets better, and drives a recession in western economies, then there could be further falls. So calling the bottom right now would be a brave decision, and it may get worse before it gets better. But based on today’s outlook, we believe it is worth staying invested in equities.
What does it mean for Moneycube customers?
If you have invested based on advice from Moneycube, your money is in an investment fund (or maybe several) which is highly diversified, and holds a wide range of assets in line with your risk-reward appetite and investment timescale.
You have bought a broad range of investments in professionally run companies which are managing their business for profit over the medium and long term. They will bounce back.
The US market is worth watching
If your equity portfolio resembles global markets as a whole, around 60% of it is likely to be invested in US companies.
So a key element of understanding the financial effect of Coronavirus is to look at the effect on the US economy and share prices.
Although many US companies have both sales and supply chain exposure to China (Apple is a good example), the US economy as a whole is reasonably insulated from China. What’s more, it has a highly developed healthcare system.
Here’s a chart from First Trust showing how the S&P 500 list of the top 500 US companies responded in the wake of 12 potential pandemics over the last 40 years.
First Trust’s data shows that the average change in the value of the S&P 500 in the six months following the initial outbreak was +8.8%, as markets bounced back from the initial uncertainty and shock of an outbreak.
The medium- and long term are what count
Right now, things look highly uncertain. But markets will recover in time, as the facts become clearer.
That’s why it’s important to look to the medium term, be patient, and stick with the plan.