Only a few weeks ago we wrote the following; ‘The new virus has affected tens of thousands of Chinese citizens and spread to over 40 countries. The respiratory infection has claimed 3000 lives so far and been declared a pandemic by the World Health Organisation (WHO).’ The virus has now spread to over 140 countries with a death toll of 7500. In light of this, our views on the impact have been revised.
China introduced tight restrictions in a bid to reduce infections, including cancelling flights, closing schools and workplaces and ordering some cities to go into lockdown with transport links closed. Perhaps that can only happen in China but it seems to have worked as new infections have been reduced to a trickle. Asia, the epicentre of the crisis has, as a result, been relatively resilient with regards to its financial markets.
A study of Coronavirus cases by the World Health Organisation now puts the mortality rate at 3.4% versus the original 2-3% estimate. There are currently 100,000 infected patients and 80,000 recovered cases. More than 80% have been mild, with 60 to 80 years plus age bracket most at risk. The 2003 SARS outbreak only had 8000 cases but nearly 10% died. This new virus is much more contagious, which largely offsets the lower fatality rate.
China’s economy has doubled since 2003 and today it is much more integrated into global supply chains. The infection rate around the world is rising rapidly. Crisis measures are being introduced globally, not least the stay at home advice of the UK government. Italy has basically closed for business and others are following suit. This is a much bigger blow to the world economy than thought only weeks ago. Factories can’t complete products if they don’t have components and people can’t go to work or buy much if quarantined. Initial estimates of the impact on global GDP have moved from 0.5% towards a 2-4% range. A recession is unavoidable now that containment has failed. However, our view remains the same. The crisis should run its course eventually and there should be an accelerating recovery as factories make up for lost time to satisfy pent up demand. It should take time for supply chains to get fully functional again so we estimate somewhere between the fourth quarter of 2020 and the fourth quarter of next year. It will be the direction of travel that will be important for financial markets.
It is inevitable that short term profitability of most companies could be seriously affected but business should recommence as usual at some point. Of course, some marginal companies should go to the wall if cash flows are disrupted too long. Portfolios should be positioned towards quality businesses with strong balance sheets.
When you invest, you are taking a long-term view, usually 10 years plus. Over that period, this event, although tragic for everyone concerned, should be regarded as a temporary setback to the global economy. The market is characterised by forced selling of geared positions by individuals and hedge funds, fund managers who have to cut some positions to satisfy withdrawals, and some multi asset funds who sell in the hope of buying them back cheaper. We aren’t doing that. We have been underweight risk assets for a while now and generally look to top up into bouts of weakness.
This pandemic is likely to last for some months, possibly until Summer temperatures help rein it in. A vaccine is unlikely to come to market until next year but in the interim, there may be some anti-viral drugs that can help alleviate symptoms and prevent deaths.
To put it in context, one billion people catch flu every year with between 290,000 and 650,000 deaths. This new virus clearly has a higher mortality rate but with the world on alert, containment should hopefully be superior. So, although things could get worse before they get better, stock markets should start to discount a return to normality well in advance.
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Chief Investment Officer