Coronavirus and financial markets

Stock markets have finally woken up to the Corona Virus this week after a mass outbreak occurred in Italy. Seeing it on the doorstep of Western Europe has been enough to make many investors conclude that economies are in for a downturn.

The first point to note about this is that it is always the black swans, i.e. the unknowns that come in and knock markets for six. The second point to make is that if your portfolio is designed properly then you most likely do not need to react. A properly designed portfolio which is diversified can stand the test of time and almost all studies show that remaining invested in the market, not timing it, is how you build capital over time. Certainly if I look back over my career, Long term capital management in 1998, Dot com bust 2000, Financial collapse 2007-8, in all these ‘events’ and there have been many more, it has been right to hold or buy not to sell.

I had a quick look into some statistics about other recent epidemics in order to try and put some perspective into the corona virus situation.

SARS

Sars occurred in 2003 and during that year the FTSE China 50 fell 20%. Other global markets fell that year and SARS was not the only reason.

In terms of death rates figures I have seen suggest around 1 in 10 or 10% of those who caught SARs died. In those days it took 5 months to identify the virus. Around 8000 people caught SARS world wide.

Ebola

In 2014 there was a major Ebola epidemic in West Africa. 28,000 people were infected and 11,000 died. For that the US sent 3000 troops to 17 treatment centres, Britain also made a significant contribution. That situation was contained. Clearly the proportion of deaths to the number infected was very high but in that instance the disease did not get out of Africa. There was a case of Ebola in the US in 2017 after an individual flew into the country but that was also contained.

CoronaVirus

So far there are around 80,000 cases and 2800 deaths. Around 3%. The low proportion of deaths notable. Although the scale of the numbers is quite high.

Science

What is very positive is the scientific gains made in the last 20 years, in particular in the scientific communities understanding of DNA. Chinese scientists have already sequenced the virus, which first appeared in December. They’ve also made that information available to scientists around the world. This means all the health authorities and universities around the world, US, UK and Europe are working toward a cure. With data processing having also sped up so much this hopefully will occur much more quickly than would have been the case.

There will be some disruption perhaps in the days ahead, however, it will be resolved and from an investment perspective we will always look for value and look to buy long term investments when they appear cheap.

CFM