Epidemics and Investing
Public health outbreaks and epidemics like the recent coronavirus can quickly scare investors and, eventually, affect economies and businesses.
Coronavirus market sell-off
If one couples a potential global pandemic with overvalued developed equity markets, there is only one obvious outcome – a sell off. Many market participants are calling for synchronised interest rate cuts from central banks to stimulate equity markets but we remain conservatively positioned and expect volatility in the short term.
The Coronavirus has been topical since mid January. Investors knew that it was highly contagious and that there was no immediate cure, however, when the first confirmed case of COVID-19 reached Europe, investors really started getting worried –
Global equity markets have taken a sharp downturn in reaction to the continuing spread of the Coronavirus in the past week, taking South African equities with them in the increasingly “risk off” environment. The FTSE/JSE All Share Index fell 11% in the week to 29 February, so that for the year to date our market is now down 10.5%. Investors are understandably concerned about this drop, particularly coming after some five years of weak returns from SA equities.
Long-term investing is often best disconnected from short-term economic reactions
We have been expecting a correction in equity markets since November 2019. Of course the economic impact of a China slowdown is very significant and it has already affected trade for most countries.
How are we positioned?
We have been underweight global equity and overweight fixed interest in our local and global funds. Globally, we are not expecting a global recession as yet but we do expect earnings to be flat for 2020 from equity markets. We are also overweight defensive sectors that should see more stable earnings come through during uncertain times.
Locally, we remain invested in local equity as we remain invested in local equity as we remain of the opinion that our market is attractive on a relative basis.
Keep Calm & Carry On
The news is currently dominated by corona virus-related items, helping to instil panic among investors. We would caution investors not to panic and sell their assets in the downturn, since they could lock in short-term losses. Rather, stepping back and taking a long-term view will help to weather the volatile conditions.
market participants tend to react to unforeseen outbreaks, but markets tend to recover by the six-month mark.
It’s worth remembering that this is only one of many “epidemics” that the world has experienced since the SARS outbreak in February 2003 – Looking at nine major outbreaks since 1998, there is little evidence linking global epidemics with long-term investment fundamentals. Global equity markets weathered all of these well, even over the shorter term.
Final thought
With lives at stake, it would be uncaring to call the coronavirus ‘noise’. Yet, if we focus on the investor’s perspective, we believe it is not time to act.
At Salvo Capital we are continually monitoring the markets to ensure we protect and grow our clients’ portfolios. We do not panic, nor do we look to change our investment process to try to accommodate the latest news and views on what is happening.
Moreover, we remain confident in our portfolio holdings because they reflect a solid base of research and resemble a well-reasoned way to invest. We certainly won’t be hitting the panic button and we hope you won’t either.
