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Coronavirus is the first big test of markets in 2020

Ed Monk

Ed Monk - Fidelity Personal Investing

Markets have opened the week sharply lower with investors wary as they assess the developing coronavirus outbreak in China.

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The FTSE 100 was more than 2% lower in morning trading with the Dax in Germany down 1.7%, the S&P 500 down 0.9% and Japan’s Topix - the only major Asian market open on Monday - down 1.6%.

The outbreak is expected to impact travel in Asia and airlines have been among the worst-hit company shares. IAG - the group which owns British Airways - was trading almost 6% lower this morning. The likelihood of reduced travel has also triggered falls in the oil price because lower fuel demand is now expected.

The news on the virus has been getting worse, even if health experts have played down the seriousness of the disease. The World Health Organisation (WHO) has so far declined to label the outbreak as ‘a public health emergency of international concern’, instead concluding that it is so far only an emergency in China.

Comparisons are being drawn between the current outbreak and the SARS (severe acute respiratory syndrome) pandemic from 2003. SARS caused almost 800 deaths from around 8,000 confirmed cases. The latest coronavirus outbreak has so far caused 81 deaths with around 3,000 confirmed cases.

Chinese officials have confirmed that the latest strain of coronavirus can be passed on in the disease’s incubation period when symptoms may not yet show - a key difference with SARS.

In 2003 SARS caused some Asian stock markets to fall as much as 10%, which perhaps explains the heavy market falls today. The Chinese government has extended the lunar new year public holidays as a means of reducing travel and the Chinese stock market is expected to remain closed this week. Futures markets, however, are pointing to heavy falls there.

For investors, the outbreak is the first test of global markets which entered the new year near record highs. Given the high valuations, profit-taking at the first sign of negative news is perhaps no surprise.

Experience suggests that it rarely pays to act in haste at the first sign of negative headlines. The nature of health emergencies is that the numbers of confirmed cases and deaths will lag the real total because it takes time for the full extent of infections to emerge. That means the news may get worse before it gets better.

The WHO has confirmed that it is working with officials in China, which should mean there is better information and greater transparency than was the case during previous health emergencies in the region. That will be key as markets assess the likely impact of coronavirus on companies and economies in the days and weeks ahead.

Ensuring investments are properly diversified across the world is the best protection against heavy falls in any one region.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Past performance is not a reliable indicator of future returns. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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