Since my last blog on this subject on 3rd February, things have moved along quickly and it is now looking increasingly unlikely that the spread of COVID-19 will be easily contained. The increasing numbers of cases outside of China is a concern, it is one thing to largely isolate a population in a Communist State like China, quite another to try and achieve the same thing in the free West!
The World Health Organisation (WHO) has not classified this as a pandemic yet but it may only be a matter of time.
Stock markets seemed quite slow to react at first but they now appear to be in full flight, at one point this afternoon the FTSE 100 was down another 4.0%, after heavy falls earlier in the week.
Despite these falls and with possibly more bad news to come, the fundamentals of long-term investing have not changed and nor are they likely to.
The following is an extract taken from my earlier e-mail because the points remain relevant, even though the situation has deteriorated since then.
How is this likely to affect markets going forward?
We don’t know for certain. In previous outbreaks (such as SARS), economic damage wasn’t really caused by the primary effect of the disease (people getting sick & dying) but by the secondary effects of the fear of the disease (people hunkering down and not travelling, shopping, interacting with other people, all of which affects company profits and economic growth). Given China is such a strong engine for global growth and the virus is centred there, the secondary effects are particularly worrying. SARS managed to knock 2% off China’s economic growth in Q2 2003 so it’s likely that the virus will have a measurable effect on global growth in 2020, although any dip is likely to be temporary, as long as the disease is contained.
As for markets, in previous outbreaks like SARS, the market sold-off sharply but then bounced back even more strongly once the outbreak started to peter out. Selling out of the market is thus risky, as it risks locking in losses but not being present for the rebound.
Every outbreak over the last 100 years has been contained and so has had little effect on the market, so the virus petering out remains overwhelmingly the most likely prospect here. But it’s impossible to completely rule out the incredibly serious tail risk of a global pandemic. This should definitely concern us, but careful action such as that being taken by the WHO and global governments is the correct response, rather than panic.
We may have more weeks and months of this uncertainty ahead of us but, as stated above, to sell out of the market now when much damage has already been done could leave you exposed if a ‘V’ shaped recovery materialises.
As has always been the case in the past, the best thing to do when faced with market uncertainty and sharp falls such as these, is nothing, no matter how hard or counter intuitive that might seem just now. The only exception to this would be if you were in dire need of funds and had absolutely no alternative but to liquidate investments.
As always, if you have any questions concerning this e-mail or any other finance related matter, please do feel to contact me at any time.
With kind regards,
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
