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Coronavirus – Is the market crashing?

Key facts to know about the Coronavirus

  • It is a far milder strain than previous pandemics such as the Spanish Flu pandemic of 1919, Asian Flu of 1958, SARS virus of 2003 and MERS of 2012.
  • It fatally affects mostly the elderly (79% have been +70 yrs) and those with pre-existing conditions (+90% suffered from cardiovascular or chronic respiratory disease, diabetes, hypertension and cancer).
  • It spreads rapidly. It took South Korea two weeks to incur in excess of 4000 infections.
  • It can be carried without visible symptoms making detection difficult and transfer unknown.
  • It is a very transmissible virus, mainly through physical touch.
  • A study of 44000 infected in China’s Hubei province (where the virus was first discovered) showed that 80% of patients had mild infections, 15% needed hospitalization, and 5% need critical care, with a total fatality rate of 2.9%.
  • The Economist magazine’s broad guess is an infection rate of between 25% and 70% per country affected.
  • A moderate global infection outcome would negatively affect world GDP by 1.3% to 2%, which would place Europe and the USA into recession.

Looking forward

The estimated time to finding a cure is 6 months to 2 years.

The biggest risk is Governments denying the spread and risk of the virus in order to contain fear. An all-out global awareness and containment is critical to reduce the spread while we wait for a cure.

A big advantage for the rest of the world is that we have been forewarned by the outbreak in China, which should assist us in being better prepared for the virus spread and treatment.

The World Health Organisation is nervous to call it a pandemic. There is hope that as the Northern Hemisphere moves into summer the spread will slow, that is if the virus behaves in a similar way to common Flu.

Poorer countries are at far greater risk of the virus spreading as a result of inadequate facilities and resources to treat infections.

Until we have a cure, or the spread of the virus slows materially, fear is likely to escalate, which will be negative for investment markets. 

Beware of further downside risk as Coronavirus fears continue

The Coronavirus is already slowing global growth as trade with China stalls. From an investment perspective, the issue is how much will it affect the global economy. Nobody knows and that is scary, which instills fear and makes investors act irrationally.

Fear is the key ingredient in a stock market crash (down 30% to 50%). I have worked through three crashes (1987 – 45%, 1998 -44%, 2008 – 46%) and it is frightening witnessing the fear in people (including investment experts) as they panic over the significant loss of wealth.

Until a cure for the virus has been found, uncertainty will instill fear in people and this risk needs to be acknowledged and managed. We do not know if the market will crash or decline further, but the probability is high until a cure is found or the rate of spread slows materially.

On the other hand, it is highly probable that a cure will be found, and that the world will be similar in a few years’ time. That’s what happened after the last three crashes. Global growth resumed and stock markets recovered sharply as visibility of the future improved.

The best way to invest is to have a long-term view, which is borne out by equities returning 7% real returns (above inflation) over the last 50 years. However, human nature often doesn’t allow us to remain rational in times of fear, resulting in investors exiting equities at the bottom of a crash (-30% to -50%) and missing out on an important rebound.

If you currently rely on your investments for income, it would be prudent to limit any further potential downside risk as the Coronavirus fear continues. Or, if you are very risk averse, it would be prudent to reduce your equities now in order to protect yourself from making an irrational decision by potentially exiting the market if it crashes.

We recommend maintaining a conservative investment strategy

At Investonline we have been recommending a conservative investment strategy over the last three years, which has worked well for our clients providing a steady 7.7% p.a. return as opposed to the JSE’s 2.8% p.a. return. We recently warned investors that global markets were expensive and risky.

If you are reliant on a stable income or just cannot tolerate long periods of slow returns, we recommend adopting a “parking strategy” into our low-risk investment portfolio which has generated a return of 8% to 10% p.a. Once the environment appears more certain, we will recommend moving into more growth assets, which should generate double digit returns.

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