Coronavirus (COVID-19) –
Looking beyond the headlines to the science and facts
Due to the recent outbreak of the Coronavirus (COVID-19) causing ripples in the global economy, we believe it’s important for investors to understand the potential implications of a pandemic on markets.
Prior to this week, markets seemed to overlook the potential impact of the Coronavirus on the global economy. However, following a large increase in cases outside of China, we have seen a sharp drop in both global share markets and bond yields. The following table shows the returns of the major asset classes from 24 February – 2 March 2020*:
What can we expect
Many parallels can be drawn between the current situation and the 2003 outbreak of Severe Acute Respiratory Syndrome (SARS), where global markets (as represented by the MSCI World $A) declined by 14% within two months. Once fears of the virus abated, markets recovered the losses within two months, as shown in the chart below.
Investors who sold out of equities at the height of the SARS hysteria were left behind when markets rebounded strongly. In fact, in the eight months following the bottom of the market, equities rallied approximately 35%, finishing 15% higher than they began at the start of the drawdown on the 14 January.
Similarly, we believe that, if the Coronavirus can be contained, markets will recover and those who remain invested will be rewarded for their patience. Investors are often tempted to time these movements i.e. employ tactical asset allocation to go to cash. However, doing so requires near-perfect timing, not only on the exit but also on the re-entry (this ignores transaction and tax costs). Missing only a few days in the market can dramatically impact your longer-term returns.
Is it different this time?
As negativity surrounds the Coronavirus in media headlines, investors could be forgiven for expecting the worst. However, there are key differences between the current Coronavirus outbreak and SARS, which could bode well for the global economy and markets. Although the Coronavirus appears to be more contagious, it has so far had a materially lower mortality rate at 3% compared to SARS’s 11%, according to the World Health Organization.
Economic repercussions are expected to be more severe this time, especially considering the increased importance of China to the global economy now in comparison to 2003. However, China has pledged to support its economy with fiscal and monetary stimulus in response to the outbreak, with the intention to keep the economy buoyant.
What does this mean for portfolios?
It’s during periods of sustained equity market stress where we expect other parts of our portfolio to buffer returns, whether it be Fixed Income, Alternatives, Listed Real Assets or even some of our more defensively placed equity managers. We intentionally recommend a well-diversified portfolio, both across and within asset classes, that have “multiple ways of winning”. Portfolios aren’t positioned to be reliant on a narrow set of outcomes, given the unpredictable nature of markets.
In addition, while active management has struggled in recent years due to buoyant markets, these types of sell-off events generally favour active investing. Active managers can respond to market stress to either protect or take advantage of market dislocations.
While we caution that there is still much uncertainty regarding the Coronavirus and its impact on global markets, we firmly believe that remaining invested through increased market uncertainty, high-quality active management and appropriate diversification remain the key to strong long-term risk-adjusted returns.
Article prepared by Zenith Investment Partners Pty Ltd (“Zenith”)
WealthPartners Financial Solutions Pty Limited, ABN 92 132 926 017 trading as WealthPartners Financial Solutions, Andrew Heaven, Bill Rainger, David Rodgers, Damian Hearn, Andrew Livermore and Craig McGowan are Authorised Representatives and Credit Representatives of AMP Financial Planning Pty Limited ABN 89 051 208 327 (AMPFP) Australian Financial Services Licence 232706 and Australian Credit Licence 232706.
Any advice contained in this document is of a general nature only and does not constitute personal financial product advice. In preparing the advice no account was taken of the objectives, financial situation or needs of any particular person. Therefore, before making any decision, readers should consider the appropriateness of the advice with regard to their particular objectives, financial situation and needs.