I’m sure most of us have been watching the worldwide spread of coronavirus with some alarm, wondering how much at risk our families and ourselves might be. Questioning what, if any, future restrictions might be imposed on our normal social interactions in the bid to control the spread of this disease. Despite the race for the Democratic candidate in the States and the ongoing Brexit trade negotiations, it is COVID-19 that dominates the news!
Markets don’t react well to uncertainty so it is fairly likely that an evolving coronavirus threat will continue to make the market-place skittish. Indeed, some investors have been selling off riskier assets and putting their money into gold or government bonds, which are seen as safe havens in the long-term, but we must try to stand back and act in a rational matter.
While the virus remained largely isolated in China most investors seemed to regard any market fluctuation as a ‘temporary glitch’. However, the virus has now taken firm hold in Europe and almost daily headlines report the rates of infection growing worryingly higher. It is possible therefore that the full economic impact of COVID-19 has been initially underestimated.
Previous economic downturns have largely been driven by a slowdown in consumer demand. The current situation is typified, at least in developed countries, by concerns over interrupted supply chains. Given our globally-connected marketplace it follows that the first quarter of 2020 must be affected by events in China. The SARS outbreak in 2003 also originated in China although at that stage China’s share of global GDP was 4% rather than approaching 16% as it is today. Nonetheless when you look at the equities market back in 2003 you can see that once the total cases of SARS started to drop, Asia ex Japan equities ceased to fall. Recent reports that the rate of new coronavirus cases appears to be slowing in China has seen equity markets rallying to some extent.
While there is never any guarantee when it comes to the market-place, the positive turn in economic activity that started in October last year, well before the virus burst on the scene, should mean that the markets can weather a temporary downturn. Central banks and political leaders have promised to use all appropriate policy tools to try and limit the impact of Covid-19 virus on global growth, aiming to restore confidence in investment markets. As a result, we have already seen markets bounce back earlier this week, although we are expecting the volatility to continue.
We feel these types of events highlight the importance of having a well-diversified portfolio along with a sensible long-term financial planning strategy.
Whilst having investments during volatile stock markets can be an uncomfortable experience, they do create buying opportunities for many long-term investors. Keep your eyes on the developing headlines but don’t let fear govern your investment decisions.