28 Feb Why markets are not immune to Coronavirus
Anyone tuning into the television or radio news cannot fail to have noticed the fixation with Coronavirus and this is unsurprising given the tragedy in terms of human life. First and foremost, we are very mindful of the humanitarian suffering and ultimately those who have lost their lives.
As of Monday, there were around 80,000 confirmed cases of Coronavirus, with 2,700 deaths. This is a very large number but the pace of growth looks to be moderating. Some of the figures do need to be viewed with an air of scepticism. Concerns have been voiced that China was under-representing the number of cases, but as the symptoms are reminiscent of flu or pneumonia, a shortage of testing kits means health officials in some countries have to rely purely on observation, so could be over-counting.
Investors will have noticed the impact the spread of the virus has had on stock markets around the world and this is again unsurprising given the one thing markets hate, is uncertainty. At times like this, it is natural for some investors to feel nervous. At CDC we are at pains to stress we are not immunologists, so making a judgment on how long this uncertainty will persist is pure guesswork, but it is important to put the market reaction into some form of context.
Share prices were, in our view, quite slow to react to the spread of the virus but the last few trading days have borne witness to a significant sell-off. Since 20th February the FTSE100 index has fallen by 12%, with the US market suffering a similar fate. This type of reaction is not unusual, with previous health crises such as SARS and Ebola each leading to market falls of around 10%, but the notable feature in each case was the rapid rebound. The recovery in share prices coincided with a slowing rate of infections and perhaps more interestingly, peak press coverage.
Whilst we cannot be sure Coronavirus will follow a similar pattern we need to remember 2019 was a stellar year for investors, meaning some will naturally be minded to take some profit. Concerns centre on the economic impact of the virus and we do see this as justified to some extent. With cities in lock-down, transport links being compromised and shipping giant Maersk already cancelling 50 trips to and from Asia, there will undoubtedly be an economic interruption.
Whilst we cannot be sure of the severity or the duration of this, investors can take some comfort from a number of areas. The first is that the US economy has been performing pretty well so probably has enough slack to cope with any economic pause. Assuming any economic pause bites in quarter 2, we think the remainder of the year will see the US rebuild inventories at a faster rate to replenish depleted stocks. It should also be remembered that central banks are in accommodative mood and will use all weapons in their respective armouries to reignite growth.
As we said, we cannot be sure precisely when infections will peak, but peak they will, at some point. Given the parallels with previous viral outbreaks, we feel a 12% fall in share prices is an over-reaction and actually represents a buying opportunity. After all, financial markets do not concern themselves with a respiratory epidemic that, according to the World Health Organisation, kills between 300,000 to 650,000 people worldwide every year. We know it better as the flu.
Dr Andrew Mann