Impact of Corona Virus on Markets – Our View

1st March 2020

There’s no doubt that last week was a torrid time for stock markets around the world with some being down more than others.

It’s difficult to calculate the impact Boris Johnson made on Thursday when announcing he would be happy to walk away from trade negotiations with the EU in June if things were not to his liking (a bit like a child saying “it’s my toy, so if I don’t win we won’t play anymore”).

You could also say that last week was a good time for burying bad news as everything was dwarfed by the panic and fears created by the seemingly impossible to stop spread of COVID-19 otherwise known as Corona Virus.

Oddly the emerging market indices suffered less than the developed markets, as you can see from the chart below which runs from 19th February, which was when the markets around the world seemed to realise this was going to have an effect:

I have read reports and research that range from complete Armageddon to don’t worry just carry on as you were. The fact is that financial markets will always over-react to events and this can be a positive over-reaction where prices seem to increase daily as the optimism just grows and grows, like the dot com bubble, or they over-react to the negative which is mostly driven by fear, and of course much of this fear is fuelled by the media pumping out the news about the negative event that can capture the most audience attention. Look what happened when Robert Peston stood outside a branch of Northern Rock on the 10 o’clock news and said banks were in trouble, next day there were ques around the corner and the bank went bust (a self-fulfilling prophecy).

I am not trying to be-little in any way shape or form the seriousness of the effects that the spread of this virus might have or the poor people that have suffered as a result of this virus, but when I see headlines on a newspaper that say ‘UK Gripped by Killer Disease’ (when there are 63.5m people living in the UK and just a handful have been diagnosed in the UK and the mortality rate is just 2% or even lower) it tells me the journalist are hard at work to instil maximum fear and create panic which in turn will create more stories. It is more about the restrictions of trade for services and goods that the markets fear, as this affects profits of companies.

As a longer term investor, you should be able to see this for what it is (part of the investment journey), markets will go up and down all the time, this is the nature of longer term investing. Neither you or I can predict the future, but we can diversify our portfolios so as to cope better with the up’s & downs of the markets. That’s why I always talk about the importance of your risk profile and the asset allocation should match your risk score, then your portfolio will perform (95% of the time) in line with your growth expectations and in line with your anticipated volatility levels. I’m sure you have also heard me going on about ‘if you had missed out on the 10 best days over the past 10 years your returns would be 50% of what they are today’ (see article in our Financial Focus magazine Oct 2019) so sit tight, try not to watch the news (or if you do, then do not let it influence you to the negative). If anything, this is exactly the sort of time you should be thinking of investing, you might not catch the bottom, but you will certainly buy in at a cheaper price than it was a week ago.

I could go into detail about the numbers of people affected and have a guess about where we go from here, but the fact is I do not have a crystal ball, nor do any of us (that includes the journalists, but they are not regulated like me, so they can say whatever they like).

If you feel the need to discuss this matter further then as usual feel free to either call or send an e-mail.