Background
The human toll of the recent outbreak is significant and continues to rise. Beyond the threat to human welfare, the actions of the governments and businesses to contain the virus – imposing unprecedented travel restrictions and the closure of workplaces – is likely to have a material impact on economic activity.
Naturally, comparisons have been made with the SARS (Severe Acute Respiratory Syndrome) outbreak of 2003, itself a strain of the coronavirus. During the infection period, over 770 people died, mainly in Hong Kong and mainland China. According to various estimates, Chinese growth was between 0.5% to 1.0% lower, with global output c.$40 billion lower than it would have otherwise been.
However, whilst COVID-19 seems to have a lower fatality rate, it appears to be more infections than SARS, spreading at a rate six times faster! Also, not only is China a much more open economy than it was in 2003, it is ten times the size (measured in current US$) so the disruption is expected to be more severe.
January 2020
Sentiment in financial markets about the effects of the virus has fluctuated. Whilst Chinese and global equity markets fell sharply in January, rising expectations of looser monetary policy saw equities rebound. Expectations that the virus would be contained to China supported prices. However, amid anticipation of weaker Chinese demand, commodity prices fell; the price of oil was down over 20%, with copper, a key barometer for the global economy, also selling off significantly. Meanwhile safe-haven assets, such as gold and UK government gilts rallied.
February 2020
As February ends, it is now clear that COVID-19 is no longer just a Chinese issue, with more new cases being confirmed outside of China than inside China. Equity markets have reacted negatively to this news. In the final week of February, the globally focussed FTSE 100 experienced its worst single day of trading for 5 years, whilst the US stock market experienced its biggest daily points drop on record, following the news of significant outbreaks in Italy (the largest outbreak outside Asia) Iran and South Korea. Stock markets around the World are suffering their worst week since the global financial crisis in 2008.
The fear that the disruption in domestic Chinese production would radiate out to the rest of the world through complex supply chains and exports, has been compounded by the global spread of the virus also depressing demand for some products. The extent of the economic impact will depend on the virulence of the disease and when it reaches a peak.
Summary
For the time-being markets have reacted in fear of the potential disruption caused to the global economy, with investors fleeing equities and seeking safe-haven assets such as gold and gilts.
It may be too early to tell if markets are simply overreacting and we will not know the full scale of the economic disruption caused by COVID-19 until first quarter economic data starts to be released.
Our investment team is keeping market volatility under review and will provide periodic updates and commentary to clients. Pension schemes have long-term time horizons and we continue to recommend a diversified approach to portfolio construction. Clients may also note an opportunity to rebalance portfolios following the sell-off in growth assets and rally in gilts – your Statement of Investment Principles will guide your approach to any rebalancing. If you have any concerns, please contact your Investment Consultant to discuss your Scheme’s specific circumstances.