As concerns over the spread of the coronavirus continue to hit the headlines, we felt it timely to offer comment on the current levels of volatility in the markets and what investors may do in response.

Until recently markets had taken the virus in their stride. However, as the outbreak has spread beyond China, uncertainty levels have risen considerably, from both an investor sentiment view point and following economic opinion on the global impact on supply chains and consumer demand.

Here is a brief overview from our team at Schroders, both of the current impact on markets and the possible longer term effects on the economy:

  • Our base case is for a short, sharp hit to consumption and activity in China in the next few months on the back of the virus outbreak. Sectors likely to be most affected are retail, tourism, lodging, catering and offline entertainment, which are already seeing a sharp drop in consumer demand
  • While China’s Q1 GDP growth will clearly be impacted, we would expect to see further stimulus measures from the government to help cushion downside in the economy, including additional fiscal and monetary support – although the impact will only feed through with a lag
  • In line with the experience during SARS, we would expect to see a rapid rebound in activity and confidence when the number of daily infections starts to peak and concerns around further spreading or mutation of the virus recedes. Given this base case, we view the event as a cyclical shock to the economy and markets rather than anything more structural in nature. As such, the impact on longer term fundamentals and fair values for the stocks that we hold should be limited even if the Q1 profits are hit hard
  • Share prices for the most obviously vulnerable companies have already corrected as the market has moved quickly to price in a weaker earnings outlook for the first half of the year
  • We have not adjusted our portfolios materially in recent days given the continued confidence in the long term attractions of our holdings, and their weaker share prices
  • We will continue to monitor the situation closely and remain cognisant of any potential impact that new developments may have on our portfolios
  • Virus aside, the overall state of the global economy looks to be in reasonable shape. Up until now, the view was that we should avoid slipping into a recession but, if disruption continues, governments and Central Banks would be expected to respond accordingly.

Johanna Kyrklund, Group Chief Investment Officer and Global Head of Multi-Asset Investments at Schroders, said:

“Until we see a peak in the coronavirus infection rates, efforts to contain the virus will significantly dampen economic activity. Markets also have to digest the likely impact of supply chain disruption on corporate earnings. Investors can expect a rocky ride in coming weeks, but markets are underpinned by the fact there is plenty of money swashing around on the side lines that could be invested. And of course bond yields remain very low, making equity yields more attractive. One area to watch is emerging markets where value is starting to emerge in some of the equities and currencies.”

At Finura, in times of volatility, we always encourage Clients to maintain a long term view on their investments. There will always be factors that effect short term returns and the coronavirus is no exception. As a result, we maintain our view that it is time in the markets, not timing the markets that will assist Clients in achieving their objectives.

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