A Time To Remain Calm

Tavistock Wealth - 28th February 2020

This is a time to remain calm, patient and focused on fundamentals whilst relying on sound risk management practices. Over the last week the number of confirmed cases of COVID-19 has risen to more than 83,000 people across 50 countries.

This has led to a sell-off in global equities and rally in safe haven assets such as government bonds. What started as an orderly re-evaluation of risk now seems to be morphing into a larger correction and at the time of writing, global stock markets are heading for their worst week since 2008.

Our current working assumption is that SARS, Ebola, Swine Flu and the Zika virus serve as appropriate templates for the current outbreak. Based on historical data, this suggests we may witness a sharp recovery in risk assets, as demonstrated in the chart.

Following the peak of prior epidemics, local equity markets have rebounded swiftly over the subsequent 1 and 3 month periods.

The number of confirmed cases of COVID-19 in China seems to be improving following an earlier jump on February 12th as health officials broadened their screening methodology to more accurately reflect the number of potential cases.  

Indeed this is what we have already seen in China where equity prices have rebounded strongly from the January low, outperforming developed market equities. Until recently the epi-centre of the outbreak, all indications suggest the coronavirus is now improving in China. Further, the government is committed to supporting the economy via interest rate cuts and additional stimulus measures.

 

The main question is whether the coronavirus will adversely affect the global economy by negatively impacting consumption, investment and trade. The longer the virus continues, the greater this risk becomes. We believe that, so long as the virus follows the above template and shows signs of receding, then the fundamental outlook remains positive and on that basis valuations look attractive. This is evident from a historical perspective in the chart shown, which demonstrates the magnitude of the recent sell-off and prior corrections which have provided attractive entry-points.

Much depends on where the virus goes from here. Compared to other epidemics, the COVID-19 mortality rate remains low but the virus has spread far further over a shorter space of time. Now is the time to remain calm, to monitor developments, employ sound risk management and look to re-engage when the time is right.

This has led to a sell-off in global equities and rally in safe haven assets such as government bonds. What started as an orderly re-evaluation of risk now seems to be morphing into a larger correction and at the time of writing, global stock markets are heading for their worst week since 2008.

Our current working assumption is that SARS, Ebola, Swine Flu and the Zika virus serve as appropriate templates for the current outbreak. Based on historical data, this suggests we may witness a sharp recovery in risk assets, as demonstrated in the chart.

Following the peak of prior epidemics, local equity markets have rebounded swiftly over the subsequent 1 and 3 month periods.

Indeed this is what we have already seen in China where equity prices have rebounded strongly from the January low, outperforming developed market equities. Until recently the epi-centre of the outbreak, all indications suggest the coronavirus is now improving in China. Further, the government is committed to supporting the economy via interest rate cuts and additional stimulus measures.

The number of confirmed cases of COVID-19 in China seems to be improving following an earlier jump on February 12th as health officials broadened their screening methodology to more accurately reflect the number of potential cases. 

The main question is whether the coronavirus will adversely affect the global economy by negatively impacting consumption, investment and trade. The longer the virus continues, the greater this risk becomes. We believe that, so long as the virus follows the above template and shows signs of receding, then the fundamental outlook remains positive and on that basis valuations look attractive. This is evident from a historical perspective in the chart below, which demonstrates the magnitude of the recent sell-off and prior corrections which have provided attractive entry-points.

Much depends on where the virus goes from here. Compared to other epidemics, the COVID-19 mortality rate remains low but the virus has spread far further over a shorter space of time. Now is the time to remain calm, to monitor developments, employ sound risk management and look to re-engage when the time is right.

This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Tavistock Wealth Limited.

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