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.
It is very easy to get sucked into the 24-hour coverage of the Coronavirus outbreak. Easy and unhelpful if you are an investor with a long-term time horizon.
The stream of headlines on the now common blog-style news websites makes for compelling reading but it conveys little useful information for stock market investors. Investing in shares allows you to participate in the earnings of companies well out into the distant future. What happens today or even over the next few weeks is really neither here nor there when it comes to our long-term savings.
More useful than fixating on the latest newsflow is to stand back and try to learn some lessons from the past. Whatever the investment warnings are obliged to say, history really can be a guide to what is to come.
One of my colleagues, portfolio manager Aditya Khowala, recently made an insightful comparison between today’s events and two related periods in the past - the 1918 Spanish Flu epidemic and the 2008 financial crisis.
His conclusion is that today’s events are better compared with the post-World War 1 flu outbreak than the credit crunch of 12 years ago.
He points out that the financial crisis was caused by a slump in house prices. Because the housing market is one of the biggest sources of consumer wealth, the impact (as in the 1930s when housing also collapsed) was deep and long-lasting.
By contrast the Spanish flu outbreak was a health scare which led to widespread but more temporary disruption. Consumption was hit hard but the impact was much shorter-lived, at least from an economic standpoint.
The differences are important from an investment perspective. As Goldman Sachs has shown, the length of bear markets and the time for markets to recover from them can vary widely depending on the cause of the downturn.
So-called structural market declines (like the one in 2008/9) are longer-lasting and take longer to heal. Event-driven slumps like today’s have historically been short and sharp and quicker to repair.
If history repeats itself, or even just rhymes, this would be an argument for sitting tight through the ongoing fluctuations. It’s worth bearing in mind that if the underlying fabric of the economy survives then demand could bounce back relatively rapidly. All the more reason for decisive action by governments to help businesses and individuals through the next few challenging months.
What is also clear from a comparison with past events is that different sectors will be affected in different ways. In some cases, this means that investors may not have reacted enough to changing circumstances - in others it means indiscriminate selling may have gone too far.
Khowala highlights the banks, which investors, assuming a re-run of the 2008 situation, have sold heavily. In fact, the banking system is in much better shape than it was 12 years ago, with better risk controls and more capital.
The real economic hit will be in the travel and tourism sectors. This does mean that the impact will be smaller because they account for around a tenth of both world GDP and global employment. The recovery from a pandemic may also be slower than from the disruptions caused by, for example, terrorism or an earthquake.
Other sectors have been hard hit but may recover more quickly. Retail is a good example. Once people have moved on from the fear of infection and containment measures have eased, then demand is likely to recover quickly. The supply side (factories and distribution systems) remains in place so should not hinder the pace of recovery.
In all cases, however, the key is to survive the trauma of the next few weeks and months. Undoubtedly many businesses will go to the wall without significant assistance from governments. The Prime Minister and Chancellor are right to describe the economy as being on a war footing.
Perhaps the area of the economy that will bounce back fastest is the industrial sector. We are already starting to see a tentative return to work in China where much manufacturing is based. Unlike after a disaster like the Fukushima earthquake and tsunami, the infrastructure is still in place and will soon be running at full tilt once workers return.
As ever, a well-diversified portfolio, across different asset classes, sectors and geographies, will offer investors a smoother ride. And steady investment through the market’s ups and downs will help rebuild portfolios at today’s fearful valuations.
More on Coronavirus and volatility
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. 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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