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Article | 19 March 2020 | Investments
Nathan Sweeney, Senior Investment Manager at Architas
In February, the S&P 500 index of large US companies suffered its fastest correction since the Great Depression. Having hit a record closing high of 3,386 on 19 February, it fell by 12% during the next six working days as the market fretted about coronavirus’s impact on the economy.
This market swing would jolt even the most upbeat investor. Fortunately, though, markets hit by disease outbreaks have a habit of bouncing back.
The S&P 500 rose by 14.6% in the six months following the April 2003 outbreak of the SARS virus. It rose by 18.7% in the six months following the April 2009 outbreak of swine flu, by 10.7% following the May 2013 outbreak of Middle East respiratory syndrome (MERS) and by 5.3% following Ebola’s March 2014 outbreak.
These statistics might suggest markets overreacted in February, and that, six months on, coronavirus’s impact could shrink and stock markets could be restored to good health. Unfortunately, this line of thought may be an oversimplification.
SARS, swine flu, MERS and Ebola made relatively little global impression. They were largely localised in China and its environs, the American continent, the Middle East and Africa respectively. By contrast, coronavirus has infected significant numbers of people outside China.
Moreover SARS, perhaps the most comparable outbreak to coronavirus, happened in 2002-03, when China made up just 8.3% of global economic output. In 2019 China’s share has increased to 19.2%, suggesting there is scope for coronavirus to make a greater impact on the global economy now than SARS did in 2003.
Dependence on Chinese manufacturers
In addition, China is more integrated into global supply chains today than at the start of the millennium. Consider Apple, one of the world’s largest companies, which recently warned on iPhone sales. It said manufacturing facilities for iPhone parts run by suppliers in China were ‘ramping up more slowly than we had anticipated’.
In our current globalised world, coronavirus’s disruption of Chinese manufacturing plants can constrict manufacturing in economies located far from China and drag down global stock markets. And Chinese manufacturing has indeed been disrupted, with purchasing manager surveys in China and Hong Kong sinking to all-time lows in February.
What is more, the SARS epidemic broke out towards the end of a three-year period of market decline, the dotcom bust, when stock prices looked relatively cheap. But markets soared to record highs in early 2020, so today’s coronavirus-driven economic disruption could hit stocks harder than SARS did in 2003.
Even so, societies can contain pandemics, viral outbreaks do fizzle out, and markets do recover from downturns. Indeed the Federal Reserve has already supported US stocks by cutting rates.
Benefits of a diversified, long-term approach
Moreover, some ‘safe haven’ sectors, such as utilities, can perform strongly when markets are uncertain. Indeed, the share price of UK electricity and gas company National Grid rose almost 10% in the first two months of 2020.
This reminds us we can potentially benefit from a diversified approach to investing, by placing our investment eggs in more than one basket. In our view, it is also important to take a long-term view with investing. Markets do sometimes decline: it is in their nature. But investing for the long term can potentially help investors ride out such declines.