Coronavirus: What should investors do?

The uncertainty about the spread of the new coronavirus (Covid-19) outside of China has led to large losses in equities over a short period of time. From exuberance to panic in the space of 5 trading sessions. Investors should not allow themselves to be infected by the panic.

The losses in equities hurt. The S&P500 has fallen by almost 15% in just one week since the number of coronavirus infections outside China rose.  At this point in time, it is not yet possible to assess in detail what the economic consequences of the virus of the virus will be. For now, from a fundamental point of view, the peak of infections outside China (where they peaked a month ago) must first be reached to properly assess the true extent of the epidemic.

What are the salient features to date that investors should be cognisant of:

1 – The coronavirus hit is a typical external shock: in this particular case, the impact on the economy can be compared to a heart attack – it is a sudden shock leading to an abrupt contraction of economic activity.

2 – Perception might get worse before it gets better: markets are increasingly pricing in the potential for a more severe scenario with the epidemic spreading across the globe.

3 – Remote tail risk: an uncontrollable spread of the pandemic accompanied by drastic sanitary containment measures could cause a deeper dent in growth with recovery only in the second half of the year.

4 – Investors are flying blind: the current lack of visibility on fundamentals is translating into increased risk premiums, implying higher future returns.

5 – No quick and easy fix: fiscal stimulus will have limited traction in the short-term.

6 – The tail is wagging the dog: monetary stimulus can help stabilise asset prices in the short-term, preventing a negative wealth effect in the system.

7 – More stimulus is on the doorstep: as global policy makers are forced to be more accommodative and for longer, one should expect a stronger global economy in 9-12 months’ time.

8 – Acceleration towards non-orthodox macro policies: Hong Kong took the first step with direct cash donations to its residents. The use of negative taxes as a policy instrument has started.

9 – We remain fundamentally constructive on risk assets: current market movements reflect changes in valuations, not changes in values.

10 – The bull market is not over: liquidity remains supportive and technicals have vastly improved.

Policymakers, like those at the helm of the Fed, pointed to possible interest rate cuts. Similarly, the European Central Bank has pointed to supportive policy measures. When even the German finance minister (the master of fiscal austerity) sees room for fiscal spending (“if needed”), you know that help is soon on the way.

The legendary investor, Warren Buffet, stepped into the fray by urging investors not to buy or sell stocks, based on the day’s newspaper headlines. He went on to say, “the real question is, has the 10-year or 20-year outlook for American business’s changed in the last week?”. If the answer is no, then you stay the distance.

At Activ8 we would endorse this view and urge investors to stick to the long-term strategy and avoid the short-term noise. There is nothing wrong or incorrect with a tactical tweak to a portion of the portfolio or a re-alignment if warranted. However, large scale selling will not be beneficial for long term growth investors.

* Acknowledgements to Bank Julius Baer and VP Bank research.