Coronavirus – Market update March 2020

Given the latest dislocation in financial markets globally I would like to update you on my thoughts on how I see things developing and what actions I am taking.

I would like to say straight away that I am not a virologist and last formally studied biology at age fourteen. However I have, as a fund manager, worked through HIV, SARS, BSE, Ebola as well as the Thai and Japanese tsunamis.

So I started with some research and I uncovered a paper from Harvard University from 2014 which stated the flu season in the US can start as early as October, does not usually get into full swing until December and ends in March. Here in the UK BUPA say the season is December to March although can start as early as October and run through May. So if this flu is anything like other flu viruses it is seasonal and has a natural lifecycle.

Whilst again stressing my lack of virology expertise I would make the following observation. Hubei Province in China is seen as the source and epicentre of the disease. Hubei has a population and land mass roughly 90% of that of Great Britain. If Western sources are to be believed then the Hubei authorities did not act as efficiently as they could have in the early days of discovering the disease in December. China also had the Lunar New Year to contend with as mass migration had already started, with workers returning to their home towns to celebrate with family. Yet despite this there are (as of yesterday) about 76,000 cases nearly three months later out of a Chinese population of 1.3 billion (the vast majority in Hubei). Given how much more warning the West has had I struggle to see (but welcome enlightenment) how the West will suffer even as badly as China, never mind suffer the fate of about 60% of the UK population being infected, as occasionally reported.

We must also remember that the mortality rate of the disease is much lower than SARS and very low indeed outside Hubei.

I realise that part of the reason the spread has been relatively muted is that China has locked down Wuhan and taken other extreme measures to lower human interaction. This has had an inevitably severe knock-on effect on economic activity (car sales down 92% year over year in the first 16 days of February and Macau Casino visitors down 78% during Golden Week are two spectacular numbers reported). This in turn will hurt small and poorly capitalised businesses which will further hurt the economy thus a downward spiral entails. And then this vicious cycle will be repeated across the globe indefinitely, or so the gloom story goes.

However, as mentioned above the virus is seasonal and will not continue indefinitely. Secondly, China is already seeing the rate of change slow, particularly outside Hubei. Indeed China as a whole is getting back to work in a measured manner. Cures are exceeding new infections already in China. Within a couple of months this pattern will be repeated across the globe.

As well as demand shortfalls, supply has also been hit in the likes of autos, semiconductors and mobile phones. Apple, Microsoft, Danone, Diageo and Starbucks have already profit warned and many more will follow. We must, however, remember two things. In many cases purchases have been postponed, not cancelled. It is unlikely the 5G upgrade cycle will now never happen or that Chinese tourists will not go to Macau next year. Similarly, not many people buy cars on impulse so there will be pent-up demand as a real need exists.

The other thing is that every government in the world is on the case. The economy globally was already gently reaccelerating from the Trade War/Brexit inspired slowdown until the virus brought it to a screeching halt, so there is real demand out there. What will happen now is that we will see significant monetary and fiscal stimulus, which is probably merited to ease the short term liquidity pressures mentioned above. However, as the economy was already recovering before the virus hit and there is pent up demand, this extra fuel will cause even more growth within a few quarters. Because of the impending US elections and the issues that Xi Jinping has had to deal with in China of late, I fully expect that stimulus measures will be kept longer than pure economic fundamentals would merit. Hong Kong has already announced a huge stimulus, including a HK $10,000 (roughly £1,000) handout to every permanent resident aged 18 or over! China has also introduced measured liquidity enhancements and several countries in Emerging Markets have cut rates. Much more action is still to take place.

So in my opinion the virus will not impact the value of equities on a twelve month view (probably not even by the end of the year). Therefore I am putting back to work the 3% I raised at the end of December and will incrementally add more after that. I have already put 2% to work and reallocated another 1.5% from Europe to Emerging Markets. Outside of the Income and 0-35% Equity portfolio strategies I added to Asia via a Vietnam Fund (where allowed). I have done so in 1% increments, which is unusual as it is inefficient from a trading perspective. But as sentiment is so febrile (literally) and volatility is high I am willing to proceed at a measured pace in order to smooth returns at the margin. It is also because nobody knows exactly where or when the bottom will be. Two weeks ago I thought US investors in particular were too sanguine (Apple was up a couple of days after warning!). Now there is global panic, including the US.

However, I am convinced the snapback will be pronounced. I am also heartened that over the last month both the onshore Chinese and Hong Kong markets have outperformed. One reason for this is they are further along in dealing with the virus.

I raised that little bit of money in December as an act of good housekeeping after a very strong run. I certainly didn’t do so in anticipation of coronavirus; however, the virus is here and has to be dealt with. I am therefore using it as a buying opportunity, as the damage (however severe in the short term) will prove to be ephemeral. A stock market history of epidemics and natural disasters supports that view. Therefore, on a one year time horizon I am now more optimistic than I was in December that we will see positive returns from equity markets. Corrections are normal and often provide good entry points thus we are adding, as we usually do in such circumstances.