Coronavirus, panic and stock markets

We can’t pretend to have anything new to say about the coronavirus except that we hope our clients and their families are keeping safe and well and free from the disease. Also, like everyone else we hope the pain and suffering of those people affected by the virus will soon dissipate.

In these difficult days when good news is scarce there does, however, appear to be light at the end of the dark tunnel. In China, the first economy to suffer the effects of the virus, recent evidence suggests the outbreak is now under control with new cases dropping substantially. The rough pattern was two weeks acceleration, approximately one week of plateau and then a gradual five-week reduction. Xi Jinping’s recent visit to Wuhan is a clear message that the Chinese authorities believe they have the virus under control. The Chinese are gradually returning to normal life.

The evidence in South Korea follows a similar pattern and if repeated, Italy should be close to the peak but clearly timescales will depend on the action taken by the authorities.

Despite this improving trend in China and South Korea, the path of the coronavirus is highly unpredictable. Clearly there are risks in human, medical and financial terms to underreacting to the virus but equally there are dangers in overreacting. Recent photographs and TV footage of people pushing trolleys up and down supermarket aisles in a frantic search for “necessities” only to be confronted by empty or ransacked shelves are reminiscent of a zombie movie and can create unnecessary panic.

But it is not the desperate survivors of an apocalyptic invasion who have swept through Tesco, Lidl or Sainsbury, but those living in fear of the rapidly spreading coronavirus. Our thoughts are with the families who have been affected by this scary virus, but the hard facts suggest that we may indeed be in danger of overreacting.

The level of fear does not currently match the level of risk. Measured against many other viral outbreaks and common diseases, coronavirus, at least at this stage, appears to be less contagious or deadly. Seasonal influenza results in three to five million severe illnesses and between 300,000 and 650,000 deaths worldwide every year. At the time of writing, total worldwide coronavirus cases is less than 128,000 with approximately 4700 deaths. There are nearly 70,000 recoveries so far. (www.worldometers.info.coronavirus)

No-one is in any doubt that the outbreak, especially the measures taken to contain and delay its spread, will have a significant impact on economic growth this year. The recent plunge in oil prices following a decision by Saudi Arabia to launch a price war have added to investor concerns.

The only question now is how deep and for how long the economy will be affected. Unfortunately, uncertainty creates fear, stock markets assume the worst, financial panic sets in, markets overreact and fall indiscriminately. Recent stock market falls have been the worst since the 2008/09 financial crisis and just as then we are in new and sobering territory. The shares of good solid companies have fallen in value the most because they are often the easiest to sell. Is Royal Dutch Shell, whose shares have fallen by more than 40% in a month, a worse company now than it was at the start of the year? We think not.

We cannot control the spread of the coronavirus or the stock market’s reaction to it, but we can learn from the irrational actions of shoppers in their frantic search for provisions. In this respect there are some relatively simple things we can do to protect ourselves and our investments.

Firstly, we should accept that we can’t control events. Nobody knows what will happen in the short term, but we do know that the stock market is the best place for our patient capital. Global bond yields have fallen to record low levels helped by additional reductions in short term rates by central banks. This means that today’s value of the far distant earnings of the companies in which our fund managers invest has risen materially.

Secondly, we must understand ourselves and know how we will react to different situations. If you can’t sleep at night because the stock market has fallen by 10% in a week then maybe the stock market is not the place for you to be invested in. It requires an acceptance that the price for an absence of short-term volatility is very likely to be an absence of long-term returns. Holding high amounts of cash will protect investors from the ups and downs of the stock market but it would be highly surprising if in 10 years’ time it produces a better result.

Finally, we should all have a financial cushion in a similar way to the people who have been scrambling for those extra provisions. Retain enough spare cash to cover two- or three-years’ basic outgoings to provide a margin of safety in the unlikely event that the worst does happen. With that comfort in place you can be much more relaxed about taking sensible market risks that will serve you well in the much more likely case that the worst doesn’t happen and everything eventually returns to normal.

We also know that some investments will do better than others and behave in different ways. We can therefore take a long view, embrace the volatility and use this as an opportunity to buy the dips and be well diversified. At the moment it is possible to invest in a long term UK government security with a running yield of 2.1% which is guaranteed for 24 years but at the end of which time there will be a guaranteed capital loss of more than 50% as the price diminishes from its current level of 157 to 100 at maturity. Alternatively, it is possible to invest in a portfolio of quality companies of the type in which our fund managers invest that collectively have the same underweighted average yield but which have the ability to grow their dividends in future as their businesses grow and mature. Which would you prefer? The Writer has voted with his feet and topped up his investments in the Clarion Funds today.

All the above are, of course, the foundations for a sound, long term financial plan of the type Clarion put in place for our clients. Whilst times such as this can be very unsettling, focusing on the long term helps to provide comfort when fear can make us act irrationally. Whatever else we do we should not be tempted to sell when values have fallen indiscriminately. If anything, we should buy at discounted prices.

When the coronavirus infections subside, we will all breathe a sigh of relief and go back to business as usual. History shows that when the panic subsides and normality returns, markets will recover, and investment portfolios will bounce back.

In the meantime, we are continuing to monitor the Clarion Portfolio Funds closely and will make any adjustments we consider necessary. Rebalancing into equity funds as markets fall will continue. We remain focused on the need for investors to maintain a well‐diversified, actively managed portfolio aiming to both preserve capital as far as possible on the downside as well taking opportunities to add to quality investments at much reduced valuations.