F.E.A.R. – Ian Brown

Clearly there is growing international concern over the spread of the coronavirus and quite obviously risks have risen materially with the spread of the virus outside of China.

If we narrow the prism of this article solely to the impact on financial markets, it was evident that up until the weekend investors saw the outbreak largely as a Chinese issue and that it would be contained. Through this lens, the apparent lack of reaction from markets was arguably rational and understandable. However, with the virus spreading, it is obvious now that the impact on the global economy will be more profound.

Once again looking through the narrow prism of investment, recognising the tragic human consequences of the outbreak, the question many investors are asking is whether they should make any changes in their investments?

In short our answer is no, provided of course investors have a sound investment plan that they can stick to.

Whilst we can’t be definitive, it is highly unlikely that the virus will have a long term economic impact and we should expect the economy to ultimately recover from the inevitable sharp slowdown.

We may, indeed, see slowing to the point of recession in the near term and it may be the case that the coronavirus could be with us for some time. We, of course, don’t know and believe it is foolhardy engaging in speculation.

What we do know is that we have seen many outbreaks in the past with relatively short lived economic impacts. Indeed, my inbox is full of reports illustrating forward returns after virus outbreaks, showing that markets move on quickly, posting strong returns after the initial panic.

We should stress though that we have no idea whether the impact of the coronavirus will be similar or not to previous outbreaks. Indeed, even the experts don’t know.

Turning to what we do know, it is clear that Chinese authorities are stimulating their economy pretty aggressively and that industrial activity in China is resuming. Interesting, Apple have also started re-opening stores in China.

We also know that governments and central banks globally are showing signs of working together and that policy is increasingly stimulatory. If people stay at home, stimulatory policy won’t help much but should the outbreak be contained we should expect a strong economic recovery.

It is also important to note that when we invest in equities we are assessing the discounted value of multi decade cash flows, so the impact of a decline in any given year is not that significant, unless we believe future growth is impaired.

This is not to say equity markets can’t correct further. So far we have seen a pretty ‘normal’ correction, with the world equity market in euro down c.9% from its recent high. On average the equity market corrects by 10% or more once a year, so nothing unusual here at all.

It is quite possible that we see a further decline but also quite possible that we see a very strong rebound in relatively short order.

The natural conclusion from this, to our minds, is simply to stick to our plan, investing in assets that we believe will deliver attractive long term returns in excess of inflation.

Ian Quigley
T: +353 1 421 0300
E: ian.quigley@brewindolphin.ie

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