Markets resistant to coronavirus

Posted by Liz Rees in Latest insights category on 14 Feb 20


China has acted quickly in an attempt to contain the spread of the coronavirus. The Chinese government imposed travel restrictions and some cities are in lockdown. The Chinese New Year holiday was extended until this week and many shops, factories and offices remain closed.

The Chinese Central Bank has injected $174bn of stimulus into the economy to support businesses in this troubling time. Whilst acknowledging the economy will take a hit, the government expects a return to normal activity levels as soon as the virus is under control.

The economic implications

The Chinese New Year break usually sees a surge in spending so retailers in China, and other parts of Asia, may see a material impact in the short-term. However, consumers can defer some purchases, which means spending might see an upturn later in the year.

The damage could be more widespread as China now plays a bigger role in the global economy. Companies selling into China, such as Burberry, have warned of a sales decline. There are reports of disruption to global supply chains and the effects are likely to ripple across the global economy.

Global impact

So far the worst of the crisis has largely been contained in China. This is why global stock markets have taken things in their stride. In fact, the US stock markets have reached record highs during the crisis.

Outlook

Prior to the outbreak, the global economic outlook was improving for most regions. Whilst the outcome remains unpredictable, it is hoped any setback will be temporary.

The painful short-term impact does not alter the structural themes that drive growth in China, and other emerging markets, such as urbanisation and growing middle class demand for branded goods. China has the money and, because it is a command economy, the means to act quickly to support the economy as we have already seen.

There will be winners and losers. Businesses will lose income from activities like eating out or going to the cinema, while manufacturers who are unable to deliver goods may lose that business permanently.

However, indiscriminate selling can provide an attractive entry point for companies that may experience pent-up demand, such as luxury goods. Winners may also include online retailers, gaming and selected healthcare providers.

Leaving it to the experts

We do not know the extent of the impact of the virus and it could do more damage to people’s lives and the economy before we see things settle down. It is natural to feel worried when we read about human suffering but it is important to separate our emotions and investment behaviour. 

However, people tend to over-emphasize the significance of current events. This is known as recency bias and explains why markets are so sensitive to the latest news on the crisis, whether good or bad. Events such as these usually have little impact on long-term investment performance.

Experienced fund managers, by focusing on their investment strategy, however, can be detached, and reposition their portfolios only when they consider it appropriate. They often use uncertainty in markets as an opportunity to invest in their favoured companies; Nick Train of Morningstar silver-rated Lindsell Train Global Equity has been adding to his investments in luxury brands.

Don’t let market uncertainty put you off. You can secure your annual ISA allowance before the end of the tax year and invest when you feel comfortable. Whatever you chose to do it is important to remember that investing should be for the long term.

It is all too easy to take good health for granted and our heartfelt sympathies lie with the people who have lost loved ones as a result of this terrible disease.

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.