With global equity markets taking a significant hit this week in light of the spread of COVID-19 beyond China, we wanted to take a look at the historical impact of previous pandemics on global investment markets.
The chart below (from Alpine Macros and Charles Schwab) details the impact of previous world epidemics, and their impact on global equity markets. As you can see, past pandemics have not resulted in any significant, or long-lasting damage to global stock prices. As would be expected, they often resulted in short-term downturns, but failed to materialise into longer-term problems for markets.
The impact of policymakers
To date, the preventative action from governments has been key to helping contain the outbreak and limit the impact of COVID-19 on economies and financial markets. That being said, there has clearly been a knock on impact with global manufacturing supply chains being affected by much of China’s extended lay-off since the beginning of the year.
This is having a knock-on effect on the profits of many companies, with Diageo for example warning investors that revenues will be lower than expected for this fiscal year, with an expected decrease of around 1-2%. Meanwhile businesses in the logistics, travel and airline industries are bracing for a tough few months.
Whilst bank share prices have fallen slightly more than overall markets, they are not yet signalling fears of a systemic credit issue. Infact, there is now a growing expectation of interest rate cuts and monetary intervention from central banks, with investors expecting rates in the US to be cut by 0.25% in the coming months.
The expectation of such interventions is likely to support markets in the short-term and could even provide a bounce in the second half of 2020. The impact of which could see company earnings expectations return to previously expected levels.
It’s not all doom and gloom
The spread of COVID-19 is obviously a concern, however with most flu-type viruses being largely seasonal, there is an expectation we will see it dissipate as the northern hemisphere enters spring time. The rate of infection has already begun to slow, and the WHO’s stance still remains that it will follow this path, whilst continued global efforts to contain the spread will further help reduce the rate of contagion.
With activity already beginning to rebound in China on the back of their actions to contain the spread of COVID-19, there is a strong belief that the impacts can and do pass if robust action is taken.
The importance of a long-term view
There’s no doubt that the current volatility in the market will take some time to pass, and we fully expect there to be further stock market falls in the short-term. Despite this, we believe it is important to remain calm, and not over-react to short-term fluctuations in the market, but rather focus on long-term investments.
There is of course plenty of potential for a bounce in the markets later this year, with infection rates already declining, and the impending fiscal stimulus with much reduced interest rates, there is every reason to believe we can still see positive growth this year.
At TWP, we believe that as long as your planning is sound, holding sufficient cash and lower risk investments to meet your expenditure needs for the next 2-3 years, then do not panic with the longer term investments and savings. Selling to cash and timing the markets will often lead to missing out on the strongest recovery periods. Sit tight and wait.
If you have any questions, please contact your adviser.