6 Mar 2020
A Market Update on the Effects of the Coronavirus
Presented by Richard Austin, Cambridge Partners Managing Partner
Watch Richard’s video presentation, or read on for a detailed analysis.
Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry amongst governments, companies and individuals about the potential impact on the global economy. Earlier this week the OECD predicted that global GDP growth could now be 1.5% in 2020, which was half the rate it was predicting before the outbreak.
But what should you do regarding your investments? As always, we lean into the evidence to determine our advice.
Looking back to recent pandemics, particularly SARS, helps provide context.
There are no definitive timelines for when SARS started and stopped, but broadly speaking the virus was active over an eight month period between November 2002 and July 2003.
It was certainly an unusual time. For anyone travelling overseas in that period, they may recall individual health screening at country borders. At the time travellers felt unsettled, but people continued to go on with their lives. Business and commerce still functioned.
Interestingly, our model portfolios performed well over that eight month period. Despite SARS and increased global uncertainty, our portfolios were up between 4% and 5% after funds management fees. One year after SARS was first observed, our model portfolios were up between 6.8% (for an 20/80 portfolio with 20% in growth assets and 80% in cash & fixed income) and 11.6% (for a 98/2 portfolio with 98% in growth assets and 2% in cash).
If investors had chosen to sell out of their investments, it would most likely have been a poor investment decision, given the subsequent performance of markets.
It may also be worth noting that SARS had a mortality rate of approximately 9.6%. How is this relevant? Well, perhaps it isn’t, but the Coronavirus has a mortality rate currently hovering around 2% and doctors are predicting it will ultimately be less than 1%.
Whether that makes it less scary than SARS might be a moot point, but regardless, markets treated investors well through the SARS outbreak and there is no reason that the same won’t happen through the Coronavirus outbreak as well.
As at February 27th, most of our model portfolios had been only modestly impacted by the increased market volatility experienced. Year to date, the approximate performances of our model portfolios ranged from +0.3% for our lowest risk portfolio (a 20/80 portfolio) to -7.0% for a 98/2 portfolio. For many, a better indicator may be something closer to a balanced 50/50 portfolio which is currently showing a year to date return of -2.0%.
The media are doing their best to paint a picture that markets are crashing, but these sorts of returns, whether Coronavirus was an issue or not, are not out of the ordinary for portfolios containing allocations to higher risk assets.
Of course, SARS hasn’t been the only global health scare to hit the headlines in the last 20 years. The following table highlights a few of the higher profile pandemics in recent history. We have identified an estimated start date for each of these pandemics and then looked at the subsequent performance of a balanced 50/50 model portfolio over the next three months, six months and twelve months.
The results may surprise you…
|Model 50/50 portfolio returns:
After 3 months After 6 months After 12 months
|Avian Flu||June 2006||0.1%||4.3%||7.4%|
|Swine Flu||April 2009||6.9%||11.7%||19.5%|
|Zika Virus||January 2016||4.5%||7.4%||10.2%|
Source: Consilium. A 50/50 Portfolio has 50% allocated to growth assets and 50% allocated to cash and fixed income.
Within the first few months, the performance of markets and portfolios can be mixed. During SARS, which was the first global pandemic to emerge in quite some time, the early reaction of equity markets was quite negative. During the Avian Flu outbreak a few years later, it was relatively flat.
What is even more striking is that markets within six and twelve months from the start of each of these outbreaks, regardless of their perceived severity, generally rebounded strongly.
What will happen in the weeks ahead with respect to the Coronavirus outbreak?
The truth is that no-one knows. Markets today are reflecting heightened uncertainty in the form of lower prices. As soon as there is new information (good or bad) this will also be priced in. When the tone of the news flow gradually changes from contagion to containment, and eventually cure, then market risk and uncertainty should reduce, which is likely to be positive for risky assets.
While this heightened uncertainty may be uncomfortable for investors, don’t be surprised if the Coronavirus can be added to the list of issues that might make an investor think about selling, our general response is that it’s unlikely to be a good idea to sell investments. Although we can’t see into the future, we can observe the past and we have witnessed the best recommendation is to stay focused on the long term and maintain your strategy.