The coronavirus (COVID-19) crisis - learning from history

Posted by Liz Rees in Latest insights category on 20 Mar 20

Geopolitics covers world events that influence economic and politics. They can affect confidence in the sustainability of economic growth and therefore stock markets.

Some are bigger than others, such as the Global Financial Crisis, gulf wars and the 9/11 terrorist attacks. However, there is nearly always something to worry markets.

In recent years, there has been Brexit, US-China trade wars and the taper tantrum but markets take these in their stride.

Markets do recover

The important thing to remember is that, if history is anything to go by, markets have recovered, even though at the time it is difficult to see an end to the crisis and the immediate outlook for the economy is grim.

Few geopolitical events have been as global as the coronavirus (COVID-19) crisis, with daily life put on hold. The immediate economic impact appears as serious as the Global Financial Crisis yet markets recovered then and indeed went on to deliver some strong returns in subsequent years.

History shows us that global health scares are usually shorter in length than other geopolitical crises. JP Morgan looked at the stock market impact of previous pandemics and epidemics such as Sars in 2002.

In every case, sell-offs were quickly followed by a recovery, although none of these were on the same scale as the current Coronavirus (COVID-19) crisis.

Each crisis is different

The Global Financial Crisis is clearly fresh in the minds of investors and indeed policy makers. However, it is already clear the coronavirus (COVID-19) crisis will take a different course with tourism rather than banks at the epicentre.

Travel and tourism accounts for around 10% of global GDP and the World Travel and Tourism Council (WTTC) has warned that Covid-19 could put 50m jobs at risk worldwide.

The banks, however, are now in a much stronger financial position. Governments and central banks, having learnt some lessons from the 2008-9 crisis, have acted quickly to ensure the financial system continues to function. 

Many other industries will suffer.  High street retailers are likely to lose out to online shops, whilst restaurants and pubs face a sudden loss of custom from which they may not recover.

Government actions to support the economy

Governments have been swift to launch huge monetary and fiscal stimulus programmes, along with financial assistance for businesses and individuals impacted by the economic slowdown and likely recession.

The UK government, for example, has announced measures such as business rate and mortgage holidays which should help protect jobs and assist a speedier recovery.

Keep calm and stay invested

The UK stock market has been hit, along with all other developed markets, with the high exposure to the oil sector particularly unhelpful. However, selling now will only realise your loses.

In this crisis fund manager Dan Nickols of the Morningstar gold-rated Merian UK Smaller Companies fund is currently finding attractive entry points in both structural growth and selected cyclical businesses.

Even safe haven assets can come under pressure in such a challenging environment, but we believe a well-diversified fund could help smooth out volatility. The gold-rated Trojan fund takes a cautious approach. The manager has a philosophy of long-term wealth preservation, although it is by no means immune to the current market volatility.