Coronavirus and toilet paper
We write to provide our perspective on the Covid-19 Coronavirus.
At the time of writing, the evening of Monday 9th March the Australian Stock Market has had its biggest one day fall since 1987 of 7% today, is at 5,760 and is down some 20% since it’s high of 7,162 on 20th Feb 2020. We can expect the media to now go into a frenzy and quote ridiculous, telephone number, dollar figures as we have broken through the psychological 6,000 barrier. Remember, a crisis sells advertising and longer or bigger crises sell even more advertising.
Of course our portfolios are diversified and aren’t 100% shares and the fund managers we utilise are cautiously positioned with more exposure to stronger companies and less to weaker ones. As an indication our typical client who is still working and building their superannuation balance has seen their portfolio fall by 10% to 12% and our more conservatively positioned retirees by 6% to 8%.
From a medical perspective, whilst the Virus will undoubtedly take many lives and be a tragedy, we have been here before. Indications are that it will be similar to previous strains of Coronavirus like SARS in 2003 and MERS in 2013. Whilst the mortality rate of around 2% to 3% of people infected is significantly higher than the seasonal influenza at 0.1%, it is lower than the mortality rate for SARS 9.6% and MERS 24.4%. Another factor is that this virus is more infectious than SARS or MERS. As with most of these things the mortality rate of those infected climbs significantly with age and pre-existing health factors. In summary you’re more likely to catch it than SARS or MERS but it’s less likely to be deadly.
You’re more likely to catch it than SARS or MERS but it’s less likely to be deadly.
From an Economic perspective it is the methods governments are using to contain the spread of the virus that is affecting the populations productivity and therefor stock markets. We have seen an unprecedented lockdown of the Chinese population at the start of the crisis. This caused massive disruptions to world manufacturing as Chinese factories shut, stopping supply of manufactured goods and manufacturing components. In addition to manufacturing, as people stay at home it has a knock-on effect to all sorts of businesses who rely on the usual patterns of life from the local coffee shops to the travel industry, retailers etc. China appears to have been quite successful in limiting the spread of virus and this severe curtailing of travel, work and public gatherings is now being replicated in other countries where the virus is spreading. With the infection rate now slowing in China the country is progressively getting back to work. This bodes well for economies and stock markets as it indicates that the timeframe from when countries are ‘locked down’ to when they start to return to normal is only a matter of several weeks and not months.
If you look at the below chart of global share markets over the last 20 years you can see where all the major Epidemics occurred. The essential difference with this one is the governments are doing much more to limit it’s spread and whilst that improves the medical outcome it worsens the economic outcome. Put simply we are copping some short-term economic pain to save more lives.
As always when the stock markets fall, we recommend investors do nothing with their investment portfolios. Whether caused by economic factors, wars or epidemics, growth markets like Shares and Property regularly have periods where they go backwards. This is the price you pay for the better long-term average returns than defensive assets like Cash and Fixed Interest. As an example, our market fell over 20% in the December quarter of 2018 on concerns about US interest rates and US vs China trade wars and then recovered all of those falls in January and Feb of 2019.
We recommend investors do nothing with their portfolios.
If you are still working and building towards retirement remember your regular super contributions are buying you lots more shares than a couple of weeks ago. If you’re in retirement and are drawing a pension from your super, you will have our Three Bucket Strategy in place for just such an event. To find out more click the hyperlink in the previous sentence or contact us for a discussion. We are deploying the protection mechanisms of this strategy for our retirees as we speak, and this will minimise their losses from selling in a down market. If you have retired family or friends who are concerned, send them this email and article and tell them to give us a call.
In summary there will be some fallout from the Coronavirus from both a medical and economic perspective and it’s got a while to run yet. The worst thing investors can do is panic and sell out towards the bottom and not participate in the inevitable rally. That would be almost as crazy as buying 6 months’ worth of toilet paper when you live in a country that manufactures it’s own toilet paper.