Don’t panic – why time will heal the epidemic’s fallout
THE MONEY MAKING EXPERT
ASIDE from the appalling human cost, investors are getting worried about the financial impact of the deadly coronavirus. With China a major global economic player, the effect on financial markets in Asia and the rest of the world could be immense. Is it time to panic – or stay calm and ride out the storm?
Why is coronavirus such an issue?
CHINA is a huge player in the global economy, much more so than at the time of the 2003 SARS outbreak. Back then, it accounted for 4 per cent of global GDP, whereas now it’s around 18 per cent. So the potential impact on other countries’ economies is far greater.
If coronavirus severely impacts the Chinese economy, it has the potential to dent world growth for at least part of this year. There is also the effect on global supply chains, trade and tourism.
Anna Stupnytska, an economist at asset manager Fidelity International, says: ‘The shock to global growth in the first quarter of this year has the potential to be significant. Even in a contained scenario of the virus outbreak, global growth could fall at least half a percentage point. The overall impact is likely to be protracted and may extend further into the year.’
She adds, rather ominously: ‘It is still too early to speculate whether it will trigger a global recession.’
How have stock markets reacted?
IT MIGHT seem surprising in the light of the horror headlines, but financial markets have been relatively calm.
Jason Hollands, a wealth manager at Tilney, says: ‘Markets have proved quite resilient when you consider the range of potential scenarios, one of which is this spiralling into a full-blown pandemic.’ The MSCI China Index, which measures the share price performance of large and mid-cap firms listed on the Shanghai and Shenzhen stock market exchanges, is up 3 per cent since the start of the year.
In terms of investment funds, the average Chinese fund is up 2 per cent since the turn of the year. The best performing Chinese equity fund is Matthews China Small Companies – up 15.7 per cent – while the ‘worst’ is Fidelity China Focus which is down just 1.7 per cent.
Darius McDermott, of fund scrutineer FundCalibre, says: ‘Equity markets worldwide were doing OK until around mid-January, at which point they fell quite dramatically, but they have since recovered almost back to the level they started the year.
‘For the moment, markets seem to have shrugged off the coronavirus concerns. But I think they are still fragile. Any sign that the virus is taking hold in any other country outside China could lead to another big fall in global stock markets.’
Should investors be worried?
AS WITH the spread of the virus, the economic and market impacts remain unclear. Stock markets worldwide have been yo-yo-ing rapidly as investors try to anticipate the effect on share prices and also vulnerable industry sectors such as airlines and tourism.
Russ Mould, investment director at AJ Bell, says international companies such as Apple, Ford, LVMH, BP, Hyundai and Carnival have all told shareholders that they are seeing a slowdown in Chinese demand. He adds: ‘Companies with sales exposure to China such as Burberry, Carnival and Standard Chartered have seen their shares lag, while commodity producers have also faltered as raw material prices have sagged in response to worries over a slowdown in China.’
Companies which have big exposure to China are particularly vulnerable. For example, there was a sharp fall in Tesla shares as the closure of its Shanghai plant threatened to derail production, although the shares have since regained some value.
US coffee shop chain Starbucks has closed more than half of its 4,000-plus outlets in China to support government efforts to contain the virus – analysts estimate that China accounts for around 10 per cent of Starbucks’ global sales.
Wuhan, where the virus originated, is a major automotive hub, with car manufacturing plants including Nissan, PSA, Honda, General Motors and Renault.
McDermott says: ‘Luxury goods companies are likely to feel the impact as Chinese customers account for around a third of the value of luxury goods purchases.’
AJ Bell’s Ryan Hughes says: ‘As well as Chinese equity funds, Asian and general Emerging Markets
funds have also been adversely impacted.
‘Investors will understandably be concerned about what impact coronavirus is having on their portfolios but as always it is important not to panic and make knee-jerk decisions that could simply lock in losses.’
Are there any financial winners?
IN CONTRAST to travel and luxury goods companies, shares in businesses whose main focus is on the domestic UK economy have generally done much better postcoronavirus outbreak – for example, house builders, construction firms and estate agents.
Some companies involved in the potential treatment of the virus have been keenly sought by investors. For example, Interactive Investor’s Richard Hunter says little-known UK company Novacyt has reported strong demand for its recently launched coronavirus detection test, resulting in its share price rising an extraordinary 600 per cent this year. Even digital currency Bitcoin is up in price 30 per cent since the New Year.
Nigel Green, of financial services deVere Group, says: ‘The ongoing upward trajectory of the price of
Bitcoin correlates to the spread of the coronavirus – it is increasingly regarded as a safe-haven asset in times of uncertainty. We can expect Bitcoin’s price to continue to rise until the coronavirus peaks, which is expected to be in late April or early May.’
Tilney’s Jason Hollands says that while now is the time to ‘tread with care’ regarding investments, those looking to invest should consider funds such as Liontrust Special Situations and Evenlode Income, ‘both of which avoid highly cyclical businesses which will prove particularly sensitive to changes in the economic environment’.