What have the markets experienced up to this point?
Markets have seen periods of high volatility in the past three weeks as investors attempt to evaluate the effects of the Coronavirus (COVID-19) outbreak.
Happening at a moment when the prospect of global growth had been increasing, with interest rates remaining low providing a conducive financial environment and enabling equity markets to achieve highs never experienced before – in the second half of February, markets started to respond negatively.
The size of the moves experienced, especially for equity markets, is similar to periods witnessed at the peak of the 2008 Global Financial Crisis (GFC).
A reaction from the fixed income and currency markets have also been experienced, through declining yields, although the equity markets had the biggest shifts.
Reacting to the rapidly increasing number of new cases across countries and regions, governments have intensified their efforts to raise public awareness as they attempt to limit the spread of the virus.
The business owners have started taking steps to prepare for the financial impact of the Coronavirus.
For long, China was the one with the highest number of cases, but now more cases of new coronavirus infections are being reported outside China than in China. And recent reports show that the USA is now the country with the highest number of confirmed cases in the world.
Considering how potentially severe the current outbreak being priced by the markets is, a point of view to take into account is the one presented by the World Health Organization.
WHO presently estimates that between 300,000 and 650,000 deaths each year are caused by the annual influenza virus (with between 3 million and 5 million cases being reported as severe cases) and the mortality rate of COVID-19 currently seems to be much greater from a humanitarian standpoint.
What makes this latest outbreak even more significant is the fact that, at the moment, there is no known viable treatment available.
What are the identified economic effects at the moment?
The closure of factories in various manufacturing sectors, mainly in China, and the travel-associated bans that are currently being imposed in other areas outside of China/Asia will definitely disrupt economic activity globally, company supply chains, and consequently company revenue looking into the future.
A majority of companies will suffer a short-term reduction in revenue, especially taking into account the shorter inventory cycles that most currently operate under (dubbed as “Just in Time” strategies).
Financial experts of Robinson Accounting say that even though the economic shock is often compared to the financial crisis of 2008, the impact is different. They say, “the crisis caused by Coronavirus is much more temporary. It’s not that people don’t want to spend money on going out, they’re just worried about catching the virus.”
“The money they don’t spend today is likely to be spent in the future, that’s why we can expect a much faster recovery once the pandemic is over.”
Only twenty days following the Chinese Lunar New Year, China indicated weak economic activity attributed to the quarantines in the mainland and travel restrictions. But according to recent reports, China’s economic activity is slowly improving.
Over the past few days, global share markets have been ridden with red as investors try to give value to the fears over the coronavirus spread.
US equity markets have been hit with their biggest falls in volatile trading since the global financial crisis. Here’s an example of the volatility being witnessed in the markets; on the 10th of March, the S&P 500 closed down -7.6%, then a 4.3% rise was seen the next day.
Besides, investor confidence is still fragile, as demonstrated in the VIX index, which is considered as the biggest indicator of fear.
The VIX index is currently at levels that have not been witnessed since the 2009 global financial crisis. The elevated level of the VIX index highlights the anxiety facing the financial markets in the wake of the impact of the coronavirus pandemic.
There has been increased pressure for more policy support from Governments and Central banks to spend. However, its influence hasn’t yet been fully felt in the equity markets after the announcement of reductions in February 2020.
Marketing specialists of Search It Local say that the local consumer behaviour in the midst of the Coronavirus crisis is rapidly changing.
They say, “with the social distancing guidelines and restrictions on eating out, there is an increase in demand for takeaway and delivery food services. People are also shopping more locally and supporting small businesses. We expect that once the epidemic subsides this behaviour will carry forward.”
The present state of the Coronavirus epidemic
Though China is experiencing a reduction in new infection cases, the rate of infections is on the rise outside of China.
The number of daily deaths and new cases in China has reduced significantly in the past few days.
The WHO-China joint mission called for a press conference this week where they noted that the rate of new coronavirus cases in Wuhan (the initial epicentre of the latest epidemic) has dropped since January 23, which suggests that the disease could have potentially peaked in China.
There seems to be no near medical solution yet, and this raises the worry of the outbreak having a prolonged impact on both economies and communities.
While clinical trials are ongoing on experimental vaccines, it will likely be several weeks or months before a drug is available on the market.
Health professionals of Gold Coast Detox and Rehab say that even though the social distancing and other regulations help to slow down the spread, the world is impatiently waiting for the quintessential silver bullet, the vaccine.
They say, “in this century, crafting a vaccine for even a long-familiar pathogen and bringing it to the market usually takes as long as 10 years. That’s why the first stages of the Coronavirus vaccine have been incredibly quick with a preliminary model ready just after a few weeks.”
“But the next stages, testing in humans and then manufacturing them for wide use, remain painfully slow. Unfortunately, the vaccine is not likely to be available earlier than in 12 months time.”
Implications for investors
As we talk about the ongoing market impacts of the COVID-19 attributed volatility, we are yet to have a clear indication from available information on how and when this recent outbreak might be contained.
Already, equity markets have priced in a major downward adjustment in growth and profit expectations. But still, historical events like these have seen markets go through recovery over the following 6 months as a potential indicator or recovery timeline.
In addition, the effects of the recent outbreak have up to this point only impacted the global supply side, while the expected 2020 economic conditions and fundamental backdrop (fiscal stimulus in China, reduced interest rates and inflation, increased demand in the United States and the likelihood of more fiscal stimulus in other regions) still is a good thing.
And it might receive further support in case the governments and policymakers anticipate a slowdown in global growth moving forward.
Though we acknowledge that our portfolios are subject to periods of negative returns, they are purposefully diversified over different asset classes, and this helps to provide investors with protection against equity market falls, such as those seen in the past week.
We continuously hold our position in accordance with our strategic goals and plan to continue rebalancing towards these goals all through the volatile period currently being experienced.
We suggest that long-term investors remain invested. Though the present period of volatility can continue, markets have disregarded major underperformance without any consideration for recovery in growth heading to the end of the year.
Are you interested in understanding how your personal financial status will be affected?