BILL JAMIESON,
Coronavirus? “Panic not and buy on the dips” is the advice of market pundits. Global stock markets always bounce back after epidemic scares – the Sars panic was followed by a 34.6 per cent rally on the MSCI World Index and the swine flu sell-off was followed by a 30 per cent bounce.
Many thought to be at risk from the virus are now being released from periods of quarantine and the increase in reported cases has started to slow. So is the coronavirus epidemic already on the wane and world markets set for a rally in the weeks ahead?
Already fund managers are reported to be buying up millions of pounds of shares in luxury consumer brands such as Burberry, Remy-cointreau, Diageo and Estee Lauder.
All have suffered sharp falls as the coronavirus has spread. But high-profile fund management groups such as Lindsell Train, Rathbone, Jupiter and BNY Mellon are reported to be buying these shares.
So far, private investors in the UK have remained calm. The FTSE100 Index of leading shares has dipped some 3.5 per cent since mid-january – hardly a panicdriven sell-off. But while the virus spreads, is there really a case for selective buying ?
The brave and bold may be tempted by the bargains on offer in the shares of luxury goods. But I would not rush to be a stock market buyer just yet. As for the gold price – a ready reckoner of market unease – the price has risen more than five per cent to $1,633 an ounce since 5 February, taking the gain since early December to 12 per cent. Says Neil Wilson, chief market analyst at Markets.com, “all the stops are out” for gold. “Momentum buying is pushing up prices even further.
“We’re seeing a very rapid march higher to north of $1,630, knocking out a fresh seven-year high.”
Each day brings reports of fresh reports across Europe and emergency quarantine measures being undertaken. The latest outbreaks are in south Korea, while in northern Italy eleven towns have been in lockdown and festivals cancelled. The prestigious Armani fashion show has had to be held in a security-ringed venue with restricted access.
Few imagined that the virus would have an impact on high-end brand and fashion items bought by the well-heeled in barely affected population centres such as New York, Paris, London and Berlin. Shares in Remy Cointreau are down by 13 per cent, Burberry by 11 per cent and Johnnie Walker brand Diageo by almost six per cent. The virus has delivered a painful reminder that China and Asia Pacific are key consumers of such brands. Chinese nationals account for 35 per cent of all luxury purchases made around the globe. Burberry, for example, makes 40 per cent of its sales in China.
The country is also a huge market for Remy Cointreau and Diageo. Many of the outlets for luxury goods in China are now closed or operating reduced hours. At the same time, retail operations in world tourist hotspots are being hit as Chinese tourists on trips previously spent some $250 billion annually.
But China remains the epicentre. With its economy now accounting for 20 per cent of the world’s economy and a third of global growth, the effects of the virus are being increasingly felt on global supply lines and activity. According to economist Liam Halligan, at least 150 million, or more than a tenth of China’s population face limits on how often they can leave home and roughly half the population face travel restrictions.
Hundreds of factories on the eastern seaboard of China have been closed. And as China is a critical supplier of machinery and parts, the knock-on effect on supply chains is increasingly evident. Nissan has had to curb car production in Japan due to a lack of Chinese components, Hyundai has shut domestic plants, and even tech giant Apple has warned that the coronavirus will now “affect revenues worldwide”.
The German Zew index of business sentiment has plunged as a result of the effects of the virus and the airline and pharmaceutical sectors world-wide are being adversely affected. The benign effects of cheap and plentiful Chinese output that has had such a benign effect on global growth could now be plunged into reverse, with far-reaching consequences – and not least for sectors and businesses that have until now considered themselves immune.
Worrying though the spread of the virus may be, private investors should guard against over-reaction – whether rushing in to buy on the dips or indiscriminate selling. The coronavirus is set to deliver an economic setback world-wide – with consequences wider than the luxury goods sector. The Sars outbreak triggered a fall in the MSCI World Index of 6.1 per cent. But the lesson from this and other previous epidemics is that markets – in time – recover.