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Coronavirus: lessons learned from the past

Graham Smith

Graham Smith - Market Commentator

While January passes into the rear view mirror, the coronavirus outbreak counts as the second negative surprise of the year to date. The first – already fading from view – was the assassination of the Iranian Major General Qasem Soleimani, swiftly followed by a retaliatory rocket attack on the US embassy compound in Iraq.

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At the time, stock markets wobbled, but the momentum of 2019 seemed to carry them through. Worst-case scenarios involving a conflict between the US and Iran didn’t seem to hold water. Tensions eased and stocks rallied.

The coronavirus is a more immediate problem. It’s emerged as a threat to people currently in poor health across a multitude of countries. China’s far-reaching measures to stop the spread of the virus from its source in Wuhan may have helped, but the task is great.

Quite apart from the human tragedy of those struck down by the virus, there will be an economic price the world has to pay too. The curtailment of eagerly anticipated Chinese New Year celebrations will have already reduced consumer spending and the earnings of Chinese and other Asian businesses. Similar effects could be felt further afield.

However, the upshot of all this will be the responses of governments. China has plenty of fuel in the tank to boost economic growth in the aftermath of the coronavirus – either through increased government spending or lower interest rates, or both – a reason, perhaps, why the general reaction of markets has been relatively contained so far.

Previous virus outbreaks might give clues as to the paths markets have yet to travel. The deadly SARS virus came to light in late 2002 and peaked in 2003, while MERS – Middle Eastern Respiratory Syndrome –struck more recently in late 20121. Like the latest coronavirus, both are believed to have spread from animals to humans and both caused a number of deaths globally at the time.

The period 2002 to 2003 is a difficult one to analyse, because the world was already wrestling with a series of difficulties. Recession conditions in the US and Europe in 2001 had shaken the investing world to its core and most people saw the attacks on the World Trade Centre in New York in September of the same year as a cathartic event that would plunge the world into years of conflict. Markets fell in 2002 largely due to fears of a protracted conflict with Iraq. Such fears ultimately proved well-founded, as a US-led invasion of the country followed in March 2003.

Understandably 2002 to 2003 was a difficult period for world stock markets for the reasons described above. However, the downturn ended in March 2003 as both corporate earnings and share prices began to stage sharp rebounds2. Given the complexity of conditions at the time it’s hard to ascribe a proportion of market movements to SARS.

Late 2012 – when the MERS virus struck – passed with barely a hitch from a markets perspective. Shares ended 2012 with a respectable annual gain behind them and they went on to perform even more strongly over the next 12 months3.

It’s important to remember that these periods were not aligned with current economic conditions. However, both periods suggest the spread of a deadly virus and the measures introduced to contain it had little if any lasting effects on world stock markets.

This contrasts markedly with the one event from the recent past that did have a profound and lasting effect on prices – the global financial crisis of 2008. The long tail effects of that are still not over – we see them every day in perceptions of job insecurity, ultra-low interest rates, sub-par inflation and central banks printing new currency to buy financial assets.

Ultimately it is more likely that the ending of this long-running story will have a greater and more measurable effect on markets from here; and that the spikes caused by geopolitical tensions and world virus outbreaks will continue to prove transitory.

Market volatility caused by short term swings in sentiment ought not to worry long term investors with diversified portfolios of assets. For them, falls in equity prices may be offset in part by rising bond prices and present opportunities to use cash reserves to add to their existing holdings.

However, the return of some market volatility comes as a reminder of the advantages of investing, not all in one go, but via a regular savings plan. This route opens the door to benefitting not only from the long-term growth of stock markets, but also from bouts of short term market volatility, since these plans automatically buy more during months when markets are low and less when they are high. Investing a set amount each month over the medium to longer term can help considerably in soaking up sporadic market bumps along the way.

More on investing regularly

More on investing in uncertain times

Source:

World Health Organization, 29.01.20
Federal Reserve Bank of Boston, 09.01.04
MSCI, 31.12.19

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. 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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