In January the consensus view was that, in the short-term, the economic impact on China would be significant in the first quarter of 2020 as consumption was hit largely due to region-wide quarantines in China. However, since we saw massive amounts of monetary stimulus from the Chinese Central Bank, a recovery was expected in the later half of 2020 and that the stimulus would carry through for the long term as well.
Furthermore, the expectation was this outbreak would largely be contained in China and possibly some other Asian emerging markets. Also the quarantine efforts in China seem to be working as the number of new cases had begun to sharply drop. Comparisons with SARS in 2003 and H1N1 in 2009 suggested this could amount to localised disruption, but did not disrupt broader market trends.
What happened at the end of February
However as the virus has spread outside of China and started accelerating aggressively in South Korea and Italy as well as other countries, it became clear that there was a risk of extended quarantine measures to high population areas across the world, triggering much greater concern for global growth as demand plummets and supply chains are disrupted.
The Coronavirus outbreak and acceleration in developed markets will cause near term volatility and a certain amount of emotional panic but the disruption is not large enough yet to cause a long-lasting global recession.
Having said that we are keeping a very close eye on developments. We expect a monetary policy response from Central Banks around the world to provide more liquidity in the markets if needs be. This would be supportive for markets.
If the Risk Barometer picks up signals pointing to medium-term deterioration into economic outlooks and market conditions (as opposed to short-run shocks) then portfolios will be de-risked accordingly. Right now, that’s not the case.
We have seen numerous shake-out events in the last 10 years, since the financial crisis, but none of them recently have materialised into a lasting global recession.
Investors accept that in order to earn above-inflation returns, capital is put at risk. Recent market moves are a brutal reminder that the value of investments is always at risk, but oftentimes that’s the most important time to “keep calm and stay invested”.
The human cost, unfortunately, is only going to get worse – even here in the UK. Statistically, there is a risk that infections in the UK could potentially surge into the thousands in coming weeks – as they have done so in Italy.
The headlines will therefore get worse.
The market will continue to be prone to volatility spikes.
As managers, we will continue with our investment process using our Risk Barometer to look through the noise to the numbers.
As a precaution, last week we successfully tested working as a team remotely in the event of a London lockdown and keep our Business Continuity Plan under review.
In the meantime, we hope that everyone stays well and stays safe and takes the recommended precautions.