As Covid-19 starts to appear in countries other than China, Ray Black (MD & Chairman of Money Minder’s Investment Committee) provides an insight to the virus and what he thinks could be in store for global financial markets and investors in the short term.

About Covid-19

Covid-19 is a new strain of coronavirus that materialised in December 2019 in Wuhan, the highly industrialised and populated capital city in the Chinese Province of Hubei. Along with many others, the Coalition for Epidemic Preparedness Innovation (CEPI) are working urgently to develop a vaccine against the Wuhan virus.

CEPI is a global partnership set up in 2017 between Public, Private, Philanthropic and Civil Organisations in response to the West African Ebola outbreak. Its objective is to protect the world against outbreaks of disease and its mission is: “To accelerate the development of vaccines against emerging infectious diseases and enable equitable access to these vaccines for people during outbreaks”.

By mid-January, Chinese Scientists had published the Wuhan virus’s genetic sequence and by late January several groups around the world were working on a vaccine using the genetic data provided. The first clinical tests on humans, for safety, could begin as early as April, (source: The Economist)

Having dominated the news over the last two months, you could be forgiven for thinking that the Wuhan Virus must be one of the most frightening and fatal diseases in modern history. However, according to the World Health Organization, the common flu virus infects hundreds of millions of people and kills up to 650,000 people worldwide every year.

As a comparison, on 26 February 2020, the JAMA network published an infographic stating that as at 21 February 20 there had been 75,569 reported cases of the Wuhan Virus (99% of which were in China) resulting in 2,239 deaths in comparison to 29 million Flu related illnesses resulting in at least 16,000 deaths in the US alone.

There have been many disease outbreaks over the last 20 years, including SARS (2003), MERS (2012), Ebola (2014) and Zika (2015). Although many of them have been followed by economic disruption in the short term, the long-term impact on investment values has been negligible and in subsequent years we have actually seen some exceptional returns.

Why have Stock Markets reacted badly in recent weeks?

Wuhan is China’s ninth largest city (over 11 million residents) and has been a manufacturing hub for global automotive, advanced and electrical component manufacturing industries for decades. It is an important area of production for the world’s second largest economy.

Very recently, with new cases being reported outside of China, tech conferences in San Francisco and football matches in Italy have been cancelled.

Unfortunately, private investors tend to react more to sensational and often negative headlines. However, more encouragingly, recent reports have suggested that the number of cases being diagnosed in the province of Hubei are now stabilising. It’s just a shame that good news like this rarely seems to make its way in to the headlines.

 

What Next?

We believe that the short term economic consequence of the Covid-19 Coronavirus outbreak is that companies and investors are concerned about supply disruptions. If, due to the lack of workers, factories become unable to produce goods at their normal capacity, it could hit the sales and profits of the companies who trade with affected manufacturers. Potentially, a prolonged and significant reduction in supply could be felt far and wide.

However, closures and disruptions to supply chains can actually provide investors with something to look forward too. Once a vaccine has been produced and distributed, the pent up demand for goods and services will need to be satisfied.

On a positive note, volatility and short term reductions in share prices are most likely to be driven by companies being unable to produce and sell their goods to the customers who want to buy them because they are more difficult to source at present. This is significantly different to an economic slowdown that is driven by lack of consumer demand. In effect, it’s just a delay in output and growth, not a reduction in demand.

This opens an opportunity to ask a very important question for investors, which is, when would you most like to invest your money? When the shares you are buying are considered to be expensive, or when they are thought to be cheap?

How much cheaper shares will become will depend on how quickly the virus spreads, how much it dampens current and future demand for goods and services and how quickly a vaccine is distributed.

Are stocks and shares a good investment choice right now?

Stocks and Shares are sensitive to both good news and bad news. In the latter half of February, markets went down after reports that the virus had found its way in to Europe.

However, whilst short term downturns in equity markets will tempt some nervous investors to encash, obtaining any measurable return on cash or bonds becomes ever more unlikely with an expectation of interest rate cuts in the US and the UK.

Most importantly, the more problematic the outbreak becomes, the more faith we can have in central banks around the world providing stimulus to aid their economies. Generally speaking, this is achieved through quantitative easing (printing money) or cheap loans companies (or even insolvent countries) to help balance the books and keep them afloat.

Since the Credit Crunch of 2008/09, we have learnt that modern monetary stimulus like this tends to drive the price of shares and real assets up. Therefore, we expect to see continued demand for stocks and shares which provide the prospect of much higher returns than cash or bonds in the current low interest, high debt ratio economic backdrop we live in.

We believe that equities will begin to rally when we see more evidence of the numbers of new coronavirus cases outside of China are starting to slow down which will confirm that the virus is becoming contained.

What about China?

Chinese stock markets have suffered some significant losses in recent times. However, in early February markets rose on positive news that the virus infection rate had slowed. They dropped again when it was reported that small outbreaks in other countries were reported. If infection rates continue to decrease, the panic over output might not last for long.

Therefore, for those with an appropriate risk appetite who have some un-invested cash that they would like to find a home for, now could be a good time to be stocking up on cheap Chinese shares.

Overall, we think that Chinese markets will recover well and that it is very likely that once the virus is contained and Chinese companies and consumers are feeling more confident about the future, potentially, we could see a very high level of Government money being injected in to the Chinese economy. After all, it’s the world’s second largest economy, they have cash to spend and in due course they may be a high level demand for goods and services that will need to be satisfied as quickly as possible to keep their customers happy.

What should investors do now?

The most important thing to remember is to stay calm. If your portfolio has reduced in value over the past week or two, its completely normal to feel disappointed about that. However, don’t let your emotions push you in to a decision that will see you realise what are at present just paper based losses.

Whilst we are not in any way advocating trying to ‘time the markets’ (after all, it’s not the timing but the length of the time you are in the markets that will make the most difference to your long term returns) some of our clients are seeing this down turn as an attractive buying opportunity. This is especially true for the UK Stock Market which at present looks exceptionally good value for money.

All Money Minder investment portfolios are built using a long-term strategic asset allocation model which helps to manage the up and downs of stock market volatility by holding a range of different asset classes. That means that when some funds are going down in value, others are rising. This helps to smooth out the ups and downs of investing over the medium to long term.

Due to the in depth and educational investment strategy meeting that all Money Minder clients go through prior to becoming a client, very few clients have been in touch with us over the past few weeks about the potential impact the coronavirus issue might have on their investment portfolios. The majority of those that have got in touch, are interested in investing more, as opposed to being worried and looking to pull money out of the markets.

Whilst we see this as a very positive sign and confirmation that our investment strategy meetings work well, as MD, I wanted to be proactive by getting in touch with all of our clients and to remind you of the long-term nature of your financial plans and investment portfolios.

At present, we are not making any significant changes to clients’ investment portfolios as we expect to ride out short-term market fluctuations by focusing on making rational long-term decisions.

We are reminding our clients not to allow fear to govern their investment decisions. The world has seen very similar health scares over many decades and previous disease outbreaks (like those mentioned above) provide valuable lessons and helps to reassure us and remind us just how good health professionals around the globe are at their job.

Past performance, whilst no guide to the future, has shown us that riding out the ups and downs of stock markets (2000 to 2003 & 2008 to 2009) is a much better option than selling out when markets are low. That’s because generally speaking, what goes down in value normally goes back up again, as long as you wait for markets to recover.

Evidence of this was seen in the first two weeks of February when Hong Kong’s Hang Sang Index (HSI) rose by over 6% on news that the number of new coronavirus cases in China had slowed down.

Overall, we are encouraging our investors to focus on the medium to long term. Demand has not gone away. Right now, we have some of the highest worldwide employment rates in history. The consumer is king and the appetite for goods, services and travel is very high.

Whilst some demand and growth might be slightly delayed, presuming the Covid-19 outbreak is contained relatively quickly, in due course, this delay could provide investors with a significant boost to their savings.

Ray Black MSc FPFS

Ray is Money Minder’s Managing Director and Chairman of the company’s investment committee. He provides guidance to the in house research team and recommendations on strategic asset allocation and tactical investment strategies for Money Minders investment clients. He is a Chartered Financial Planner and holds the Advanced Diploma and the highly respected and very rare to find Masters Degree in Financial Planning. He is a fellow of the Personal Finance Society and a Society of Later Life (SOLLA) accredited adviser holding professional qualifications in discretionary investment management and higher level investment planning, retirement planning, corporate financial planning, taxation and trust matters. Ray is frequently asked to provide comment on financial issues for the national financial press and UK based financial planning subscription magazines. He has been a regular contributor to BBC Radio broadcasts and frequently presents retirement planning, investment planning and long term care planning workshops to public sector workers.