Coronavirus finally infects financial markets

A cancelled Tokyo Marathon, countless postponed travel plans and lockdown in Northern Italy, the CoronaVirus Covid19 is certainly causing havoc around the world.  According to the World Health Organisation, more than 77,500 people had been infected by the start of this week, with a death rate of around 3%, or 2,500 people officially succumbing to the virus.  It has taken advantage of our globetrotting antics, spreading around the world rapidly, and ensuring shifty glances when someone so much as sneezes on a bus.

Compared to the SARS outbreak in 2003, which infected nearly 8,100, Covid19 means business.  But if headlines over the past two months have been full of new cases, quarantines and efforts to contain Covid19, the financial world had seemed immune to the panic.

This week, however, things seem to have turned.  Stock markets around the world have tumbled as the realisation of the potential impact of the outbreak has filtered through to business leaders and their financial backers.  By the end of play Tuesday (Feb 26), the S&P 500 in the US had shed more than $1.7 trillion in value.  The Dow Jones Industrial Average was down 3.3%, at its lowest point on Tuesday, after dropping around the same amount a day earlier, marking its third worst one-day point drop in its 124-year history.  In London, the FTSE 100 dropped to a 12-month low on Tuesday, falling further today to where it ended 1999.

China has sneezed and the world is catching a cold.


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The finance world’s Dr Doom, Nouriel Roubini, chastised the sector for complacency in today’s FT, warning that things are going to get worse before they get better.  Dr Roubini explained that markets had missed how disruptive the quarantining would be to daily life, which would be a direct impact on productivity.

Put simply, if people are not allowed out of their houses, how can they make all the things companies need to sell or carry out the service-type work that fuels the global economy?

And this is the real nub of the issue. The virus originated in China, which is where a very large amount of these “things” are made. The country has sprung into action, arguably belatedly, and created vast numbers of quarantine zones that are seeing huge numbers of businesses pause production.  In South Korea, too, we are seeing house-arrest-style edicts, which is concerning business leaders – and now financiers – too.

But it is not just these (albeit massive) economies that will be impacted. China produces vast amounts of component parts for things built in the UK, Europe and elsewhere. We’ve already heard of car parts being smuggled from China into UK factories to keep their production lines going.  If these vital components start drying up, production lines in countries that are as-yet untouched by the virus will have to slow, too. You can’t sell a car without brakes.

As the outbreak continues to spread, governments around the world will continue to enforce quarantines, which means people will not be able to work, or at least not at full capacity.  It also means people will not take holidays or business trips, go shopping, to the cinema or eat out as much, which will have a huge impact on retail and leisure sales, and the global service industry.  And here’s the kicker – once this is all over, we will have to wait for the global economy to recover, which will not just happen overnight. Confidence is lost much more quickly than it is gained.

Getting production lines moving, workforces re-mobilised and back to “normal” takes time – especially if you have lost several thousand to a virus.  What does this grim news mean for investors? The good news is that lots of good quality companies are trading very cheaply, having been dragged down by the surrounding panic and uncertainty, so it could be a good time to buy.

It will pay to be choosy, though, and focus on essentials and sectors that may be less impacted than others. A global outbreak of a killer virus is potentially dynamite for social media companies, for example, while airlines and holiday companies might suffer a drop in trade, at least in the short term.

At this stage, however, for investors, long-term vision is key, as is staying aware that panicking markets usually de-panic eventually.  It also is a reminder that even if things are looking good and companies, markets and currencies are doing well, something entirely unrelated can shake the whole thing up. Remember the Black Swan? It’s just landed. We just have to wait for it to fly off again.




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