Market Update - Coronavirus
25 Feb 2020
As we are discussing a virus, we apologise if this update seems a bit callous and focuses on this event from an economic and market perspective.
We saw price declines yesterday, after which the US futures were heading up and then the US received the following announcement.
"We expect we will see community spread in this country," said Dr. Nancy Messonnier, director of the CDC's National Centre for Immunization and Respiratory Diseases. "It's not so much a question of if this will happen anymore, but rather more a question of exactly when this will happen and how many people in this country will have severe illness."Dr. Nancy Messonnier
The agency tweeted Tuesday evening that Americans should think about getting ready.
While we are not going into the mathematics of calculating the likely spread of the virus, the main points to note are:
- Viruses will either spread or die out. There are forces that tend towards spreading and there are drivers that make the virus die out. These vary based on the virus, but clearly reducing people that you come into contact with is one of the basic controls;
- If the virus spreads to countries with less strict controls, further from the original source, it becomes harder to isolate and end;
- While clearly a horrible virus, at this stage, it has seen less death and sickness than the annual flu. In the U.S. alone, the flu has already caused an estimated 26 million illnesses, 250,000 hospitalizations and 14,000 deaths this season, according to the Centre for Disease Control and Prevention (CDC);
- That said, scientists have studied seasonal flu for decades. So, despite the danger of it, we know a lot about flu viruses and what to expect each season. In contrast, very little is known about COVID-19 because it's so new. This means COVID-19 is something of a wild card in terms of how far it will spread and how many deaths it will cause. You know when the flu season ends each year.
Impact on the economy:
- The major economic impacts are due to the actions taken to stop the spread of the virus. If people don’t go to work, or do not go out to eat or shopping everything stops;
- With global supply chains there can be a lot of disruption. For example, if one part is made in China, the product cannot be manufactured. All this disruption reduces activity.
This will normally result in a sharp decline in the economy, which is normally followed by a sharp rebound once the virus is contained. Trying to out-guess the scientists who are unsure and do not have the information or the answers is absurd. This is what is referred to as a Black Swan, an event that could not possibly be predicted.
Once again, the flawed assumption that investing is about predicting the future, rather than preparing for a range of outcomes.
These unexpected events occur. Any unusual event is unlikely in isolation, but there are billions of different unlikely events, so that it becomes likely that some unlikely event will occur or even many unlikely events.
We position portfolios for a range of outcomes. We were already underweight shares, primarily due to our view that valuations were a bit stretched, particularly in Australia. We had been saying that there was too much focus on low interest rates and people were moving up a risk curve that they did not understand. Many clients will notice that we have been selling more than buying for some time and the resilience of our portfolios allows us to buy at these lower prices. For newer clients, they will be aware that we have been taking our time to invest the funds.
We hold quality assets that may see some price volatility, but once the virus or any other issue passes, they remain strong and rebound quickly. Sometimes they are even stronger as some of the competition goes under or is weakened by the downturn.
For other lower quality investments, issues such as high debt levels, significant overvaluation, weak industry positions, etc… how long the difficulties go on are crucial. If a company has high debt, they have interest to pay and in tough times, banks can really cause problems. So, these investments may be ticking time bombs and if the economic drag lasts too long, they can be liquidated or severely damaged. I would not want to own a tourism related business with too much debt at the moment.
This also applies to economies. If households have big debts, then they will come under pressure much more quickly. If policy tools have been fully utilised (interest rates cannot go much lower, but Central Banks seem to have some tricks in their kit, that do not seem to be available until we need them).
This virus is a good example of why Intralink has our well-defined investment philosophy:
- Quality Investment;
- Focus on valuation and taking profits; and
- Being aware of situations that can lead to unacceptable loss (speculating, high household debt, unexpected inflation and significant overvaluation).Intralink Chief Investment Officer, Brendan Waller
While we cannot predict all possible implications of the virus, we are confident in the quality of assets we invest in. History has shown that downturns due to passing events, are better times to buy than sell, especially if you can do it gradually over time.
If you have any questions or require any further information, please contact our office on (03) 9629 1100.