The new strain of coronavirus, known as COVID-19, like its older cousins MERS and SARS, possesses the unfortunate (for human beings) characteristic of being zoonotic, that is, transmitted between animals and people. It is also highly contagious, with potentially fatal consequences. There is, as yet, no vaccine. Governments are struggling to contain regional outbreaks, stockmarkets are collapsing, borders are closing, and people are worried.
The alleged source of COVID-19, a food market in Wuhan, China appears to have created the perfect conditions for the unintentional incubation of this new virus. Descriptions of the source read more like an opening chapter in a new apocalyptic Michael Crichton novel. However, this is happening in the real world, and happening fast.
As with most crises of this nature, the absence of reassuring historic comparisons perpetuates the panic. Our imaginations can run riot, hence stockpiling of face masks and basic toiletries, canned and dried food. Until recently, very little of this had impacted the US but now that the first few cases have been detected, a drama will quickly be turned into a crisis. It could even derail President Trump’s campaign for a second term in office.
Equity markets have taken a battering. From their distant peak in mid-February, world equities have tumbled by over 20% in sterling terms, entering a technical bear market and suggesting imminent recession. Although much of the selling has been automated and indiscriminate, certain sectors have fared especially badly. Predictably, gold and government bonds have performed relatively well. Computer generated trading has, however, pulled down the good with the bad. As with every stockmarket crisis, opportunities lie ahead.
Central banks have responded by throwing money at the problem. Interest rates have been cut; cash has been made available to those in distress; budgets have been generous. To date, these actions have had little impact on equity markets. Fear has the upper hand right now and the mood swing from optimism to despair has been breathtakingly quick. Unhelpfully adding to the sense of crisis has been the decision by Saudi Arabia to flood the market with cheap oil, after a breakdown in pricing discussions with Russia. This has put pressure on parts of the corporate bond market on which large parts of the energy market relies, notably the more fragile North American oil fracking companies.
Expert predictions of the dire humanity consequences of earlier viral-induced crises (e.g. SARS in 2002/3) were, in hindsight, often embarrassingly wide of the mark. This time around, matters have not been helped by the sheer volume of (mis)information available online and the fact that air travel, efficiently transporting COVID-19 around the world, has become as commonplace as catching a bus.
Containment of any virus is usually the first line of defence, and governments have been slow to react to an issue about which they have had prior warning several times over the last couple of decades. They are now trying to regain the upper hand and restore public trust. By the time this happens, however, the virus may well have been contained by natural means – better weather and improved basic hygiene.
Managing investment portfolios when markets are in such turmoil presents its own set of challenges. Volatility is pronounced and share price movements are random. In conditions such as these, it is important to step back and examine portfolios, line by line, to ensure that companies have enough cash to carry them through what we expect to be a relatively short-lived crisis. A single day is all it takes to push a marginal business into liquidation.
The obvious casualties of the current crisis are travel-related business, oil companies (especially those on the margins of exploration and production) and entertainment businesses such as cinemas, restaurants and pubs. On the other hand, the pull-back across the whole market means that there are opportunities to buy into high quality stocks for far less cost than was the case several days ago. Late in the day, but helpful nonetheless, European regulators are implementing a partial ban on short selling. We expect further monetary, fiscal and regulatory measures to be deployed to restore calm in the face of ongoing uncertainty.
Trying to time daily market movements is for the brave, foolish or lucky. But for the patient investor with an eye on value, quality and income, accumulating assets at these lower levels is a sensible long-term strategy, even if instinctively, right now, it may feel like entirely the wrong thing to do.
Article written on 13 March 2020 by FIM Capital Limited.