Coronavirus: Worse than a sneeze, but not the apocalypse

Global markets have caught the coronavirus - with the MSCI world index plunging about 11% in the last week of February, rebounding slightly this past week but remaining down some 7% year to date.

The sharp fall followed news that cases had reached South Korea, Iran and Italy, leading to fears that the virus could have a far greater impact than markets were initially anticipating. It continued to spread this week, reaching SA on Thursday.

Market reports and warnings, like that from the Organisation for Economic Co-operation and Development that a prolonged outbreak could halve global growth from 3% to 1.5%, have spooked investors globally into selling off equities and buying bonds.

Commentators are even referring to the spread of the virus around the world as a black swan event — an unforeseen rare but dramatic development — for the global economy.

South African markets have not been immune, with the JSE all share index falling 11% in the last week of February. Despite some recovery this past week it is still sharply down for the year to date with more volatility likely as the virus compounds SA's many economic problems.

The news can be unsettling, but if you are investing for the long term, instead of looking under a microscope at the headlines, take a broader view, asset managers say.

Peter Brooke, head of the macro boutique at Old Mutual, says the virus will have a material impact on the global economy, which is bad news for company earnings and ultimately the shares in which you may be invested in markets around the world.

He says it is likely to have a more severe impact on markets than the severe acute respiratory syndrome and Zika viruses.

Citi Research figures widely quoted in US business publications show that the severe acute respiratory syndrome took the US equity market as measured by the S&P500 index down 12.8% in just over a month in 2003 and the Zika virus took it down 12.9% in just over two months in 2015/2016.

The latest events will be more severe for global growth because China's place in the global economy has changed dramatically since the respiratory syndrome outbreak, says Schroders economist Azad Zangana.

China represented 4.2% of the global economy in 2002 and contributed 18% to world GDP growth. By 2018, its share of world GDP had risen to 15.8%, with 35% of global growth coming from China, he says.

But Brooke says at best guess the market contagion will last a couple of quarters. It will be a one-off event with a sharp impact from which markets will rebound.

Global asset managers with funds available to South Africans back this view. Franklin Templeton's head of global macro, Michael Hasentab, said in a recent blog post that investors are expecting a sharp recovery although there are concerns about how long the economic effect will last.

Guy Monson, chief investment officer of the UK-based Sarasin & Partners, says in his outlook that as the virus spreads and countries implement quarantines and travel bans, global GDP is likely to be negative for the first quarter of this year, for the first time since the 2008 financial crisis.

Monson says the world is more connected than it was in the previous decade, so "the initial shock will be amplified across regions through travel, tourism and trade channels worldwide". He says the unpredictability of where virus "hot spots" will occur is likely to disrupt economic activity in a number of
regions simultaneously in coming weeks.

But looking further ahead, managers are less pessimistic.

Toby Hudson, an analyst for Asian equities at Schroders, says the virus is not expected to harm the longer-term growth outlook for China or other Asian economies, but will lead to a sharp cyclical slowdown that lasts a few months.

Monson says the impact of the virus being potentially huge and unknowable led to the global market's aggressive drop, but this fall could reverse, at least in part, when the spread of the virus appears to peak.

In SA, Prudential advises its investors not to panic and sell assets as they will lock in losses.

Pieter Hugo, chief client and distribution officer, says while there will undeniably be some damage, Prudential's fund managers are working to separate short-term "noise" from serious developments that will have a fundamental, longer-term impact on company earnings, and will incorporate those insights into its investment decisions.

Economies and markets aren't always aligned, and when it comes to specific shares and the ones in which your manager has invested, there may be even less alignment.

Monson and Brooke both say they expect companies to be affected in different ways — some producing consumables will suffer more permanent damage, but others will rebound, aided by pent-up demand when economic activity returns to normal.

Monson says businesses that are well capitalised, diversified, broadly liquid and driven by strong trends — the kind in which Sarasin invests — shouldn't be badly hit.

Hudson too says some companies' expected earnings may be adjusted downwards, but this should have far less carry-through impact into next year and beyond.

Brooke expects governments around the world will introduce fiscal stimuli, like the US rate cut this week, and this will aid the recovery.

So in the short term, you can expect your investments, both offshore and local, to suffer. Funds diversified across asset classes and across local and offshore markets, should fare better than those exposed only to equities, Brooke says. Rand-denominated funds will also have benefited from the weakness of the rand relative to other currencies, he says.

But for investors with longer-term horizons, the effect of the fall and expected recovery will "wash out into noise in the market", Brooke says.

Long-term investors should sit tight and keep saving as investor fears and market falls create opportunities for fund managers to buy shares of good companies at low prices.

The global market's pullback takes away some of the excitement, but it has probably only taken the market back to where it was six months ago, he says. It is a correction, but it does not "wipe out" the good returns you have enjoyed from global markets over the past decade, he says.

Falling prices in the local market,
however, have moved local shares from being cheap relative to their own history to being even cheaper on a number of measures of valuation, Hugo says. Prudential is already overweight local shares, he says.

Many factors are weighing on the local market, with news this week that the country is again in a recession adding to concerns about poor results, Eskom and a potential ratings agency downgrade.

But Brooke says when shares are even cheaper it increases the potential to earn good returns when conditions improve and the market rebounds. The best opportunities arise when fear leads to investors not buying, he says.