Coronavirus Strategy Update

David Long
March 2, 2020

You will most likely be aware that uncertainty relating to the spread of Coronavirus triggered significant market volatility last week and we must expect further volatility in the weeks to come.

During such periods of heightened volatility, it is critically important that investors keep well-grounded in the longer term view, so as to avoid getting caught out by sudden market movements.

Our investment strategies were cautiously positioned in advance of last week’s movements, but all investments are impacted to varying degrees by market turbulence and we must expect a period of volatility in portfolio performance. This is entirely normal and expected from time to time. Indeed such periods of turbulence often provide the best opportunities for investors to build portfolio long term positions at good entry prices.

It became clear last week that COVID-19 was not going to be contained in China/Asia but would likely spread around the world to varying degrees and that this would have a wider impact on global growth and generate financial stresses in the first half of 2020. This development largely took the markets by surprise as all evidence prior to this suggested that the virus was being successfully contained. It is now clear that this was due to a lack of testing outside of hotspot countries and that the virus had spread further than was previously understood.

The significant fall in equities last week reflects the degree to which markets were surprised by this development. However, having factored this news into prices, financial markets will now be looking beyond the 3 month time horizon to consider what the longer term economic impact will be, how quickly activity will rebound and what actions governments and central banks are taking to mitigate the impact of both the virus and any resulting financial stress.

We took the view on Friday that markets had overreacted, moving too far too quickly. Many blue chip companies with strong earnings and good dividends were trading on extremely low valuations. We took advantage of this to add to equity positions on Friday afternoon. It may well be that we add further to equity positions over the coming weeks if and when market volatility provides good long term buying opportunities.

It is our view that while significant downside risks cannot be ignored, they are likely to be contained to an extent by what is often referred to as the central bank ‘put’. We saw the first move in this regard over the weekend with a coordinated statement from central banks around the world confirming they would take whatever action necessary to support the financial system. It is likely we will see interest rate cuts and potentially further quantitative easing from central banks over the coming weeks which may trigger periods of significant gains which can catch unsettled investors out.

Over the longer term we believe that the measures designed to control COVID-19 and the degree of public anxiety (cancelled holidays, closed businesses and supply disruption) are likely to have a far greater impact on economic activity than the virus itself. Ordinary flu claims an average of 300,000-600,000 lives a year globally, and for most COVID-19 is a relatively mild form of flu, with only around 5% suffering serious complications and a mortality rate in the region of 1-3% currently.

We expect the current period of uncertainty to extend through at least until April or May, at which stage we would expect the outbreaks to begin to decline as control measures and public awareness stem the infection rate and spring weather in the northern hemisphere naturally slows the spread of the virus. Of course it is unlikely the virus will disappear but one remarkable feature of this outbreak has been the extraordinary speed with which a vaccine has been designed, developed and is already moving into human trials. It is likely that an effective vaccine will be in production by the summer with sufficient time to build up supplies ahead of the 2021 winter flu season.

Of course, events are changing daily and the future is impossible to predict with certainty; however, we are monitoring developments continuously and will take such actions as we feel necessary to either protect investment portfolios or to take advantage of short term market weakness to build positions. We will update you periodically as developments emerge.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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