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Article | 13 February 2020 | Investments
Public imagination and financial markets have both been impacted by the coronavirus outbreak that has emerged from Wuhan in China. Indeed the Shanghai stock index fell around 9% on 3 February, the first day of trading following the long market closure for the Lunar New Year.
The outbreak is at a relatively early stage, making it hard to assess its full human impact, let alone its investment impact. But, from an investment perspective, it is helpful to keep in mind some key principles. First, diversification across regions and asset classes can help build some resilience, as it puts your investment eggs in more than one basket. Second, investing for the long term can help ride out the ups and downs that often affect markets.
via coughs and sneezes. Common signs of infection include respiratory symptoms such as fever and cough and can cause, in more severe cases, pneumonia and even death.
It has spread quickly. On 27 January, less than 5,000 people were reported infected. This increased to almost 10,000 on 31 January and topped 20,000 on 3 February. The mortality rate in early February was estimated at around 3.5%.
The virus had a quick impact on the Chinese economy. The outbreak coincided with the Chinese Lunar New Year holiday. China’s Ministry of Transport estimates the decline in travel on the first day of the Lunar New Year amounted to -28.8% when compared with the first day last year. And Chinese economists think the outbreak could take more than 1 percentage point off economic growth in the first quarter of 2020, reducing it to less than 5%.
Crucially, China today is a key part of global supply chains: even goods not wholly made in China often contain Chinese parts. So the shutdown of many Chinese factories is a big driver of the strong market reaction in China and globally. Even so, the US market looks more likely to settle relatively quickly, as extended US market falls due to health crises, political turbulence and geopolitical threats are relatively rare.
A good point of comparison for coronavirus is the 2003 SARS outbreak, which also began in China. The World Health Organization estimates there were around 8,000 cases of SARS in total, which has been exceeded by coronavirus, although coronavirus currently has a lower mortality rate. SARS had a significant negative economic impact, most notably in tourism, air travel and domestic demand in Asia. And it hit stock market performance, particularly in Asian emerging markets.
Reassuringly, markets started to recover even before the number of new SARS infections began levelling off, partly due to improved knowledge of the SARS virus and of how to prevent infection. Moreover, once the outbreak passed, economic activities quickly rose to pre-outbreak levels.
It is possible coronavirus may not come under control as quickly or as effectively as SARS. But our unfamiliarity with coronavirus does not necessarily make it more of a threat than other viruses we have faced.
Furthermore, China has already acted to limit the spread of the virus. It has been quick to build new dedicated hospitals (the first was completed in less than 10 days!) and put cities under lockdown. Meanwhile, the People’s Bank of China has provided support to the financial system, initially through cash injections.
We had been expecting a recovery in manufacturing indices and global earnings figures in early 2020. In our view, coronavirus will pause rather than halt this recovery. After all, once coronavirus is contained we would expect companies to restock inventories, individuals to purchase things, and people to undertake travel they had deferred.
It seems likely we are going to face continued market volatility, in the short term at least, due to coronavirus. But a well-diversified portfolio and a strategy of investing for the long term can help ride out any turbulence caused by the outbreak and provide some reassurance to concerned investors.
The value of investments and any income from them can go down as well as up and is not guaranteed, and you could get back less than you originally invested.
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