Coronavirus fears spread to stock markets

Posted by Liz Rees in Latest insights category on 26 Feb 20

An update on the epidemic

A big rise in new cases in Italy, South Korea and Iran raised concerns over the global reach of the virus. Italy has reported over 300 case and 10 deaths whilst South Korea notified 1,146 infections and 11 deaths. Both countries have imposed quarantine measures and travel bans in an attempt to contain the outbreaks. There have been further cases in Croatia, Austria and Switzerland.

There are some encouraging signs. Wuhan, the origin of the outbreak in China, now has more people leaving than entering hospital. Furthermore, the infection rate has also slowed in the rest of the country.

Nevertheless, it is clear that the threat to wider society, economies and markets has increased.

Market reaction

European stock markets fell heavily on Monday and Tuesday. Italy was worst hit, with the main index down over 7% whilst the Cboe UK 100 index (a proxy for the FTSE 100) fell over 5% the first two days this week. Airlines, travel, oil and mining companies suffered the largest losses.

Even if the setback proves temporary, global supply chains face disruption, with automotive companies in particular flagging concerns. A number of Western consumer brands, from Apple to Burberry, have reported a steep dip in sales in Asia.

Some demand will be deferred rather than surrendered, however, the International Monetary Fund’s current forecast of a 0.1% hit to global growth this year could prove to be an understatement.

Not a time to panic

Stock markets hate uncertainty and tend to over-react to short-term scares. Unfortunately, the spread of the virus and its impact are almost impossible to predict.

It may seem prudent to sell in case the situation deteriorates, looking to protect your money. However, in these situations, investors often don’t return until after the risk has gone and markets have recovered. Trying to time the market is extremely difficult and can often mean investors realise losses and miss out on future gains.

We believe investing is for the long-term and market falls can provide opportunities for those who can tolerate short-term volatility. Some well-respected fund managers are taking this approach. In a widespread sell-off there may be attractive opportunities to pick up the shares of businesses that have escaped harm, such as e-commerce and healthcare.

The most important thing is to remain calm and don’t make rash decisions. If you have long term goals, it may pay to stay invested as over the long-term markets have, in the past, tended to rise.

Ensure your portfolio is well-diversified

In turbulent times ‘safe havens’ have tended to perform well and the gold price has touched a 7 year high. This illustrates the benefits of having some defensive investments in a balanced portfolio.

A fund which has capital preservation at the heart of its investment philosophy is Morningstar gold-rated Trojan Fund. Manager Sebastian Lyon invests across a range of assets which have demonstrated low levels of correlation in order to help smooth returns in volatile markets, although an investment can still lose money. It currently has an allocation of over 7% to gold bullion.

Gold mining funds, such as bronze-rated BlackRock Gold & General are a popular way to get exposure to a strong gold price but it should be remembered that this is a specialist, and sometimes volatile, sector.

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser. Remember that pension and tax rules depend on personal circumstances and may be subject to change in the future. Past performance of an investment is not a guide to future performance, the value of investments or income from them may go down as well as up.