Economic Commentary January 2020 (part 2)


COVID-19

 

The conclusion from our recent 2020 Investment Commentary now appears very apposite!  An unknown unknown that no-one had considered -  unknown animals, carrying unknown benign viruses would meet and the result would close down cities!  But we are not Epidemiologists, and we leave the science to the experts!  Looking at financial markets however, the economic impact is key.  Authorities in China and across the world seek to contain the spread of the virus, closing down transport networks, and this causes disruption to normal economic behaviour (shopping, leisure, travel and work become more difficult).

 

The question is time.  In terms of Global GDP, China represents around 15% of total world output, and has significant Just In Time networks across the globe, so there is the potential for economic shocks, the longer this continues.  The recent losses in equity markets across the world, are investors now pricing in how long (and how much damage) this slowdown could achieve.  Central Banks and policy makers are already stepping in, providing interest rate cuts as well as tax cuts for businesses.  The longer this continues, we would expect more central bank and government policy intervention, resulting in a “bounce” at some point in the future, at least, history shows us this:

 

Epidemic

Month end

6-month % change of S&P

12-month % change of S&P

HIV/AIDS

June 1981

-0.3

-16.5

Pneumonic plague

September 1994

8.2

26.3

SARS

April 2003

14.59

20.76

Avian flu

June 2006

11.66

18.36

Dengue Fever

September 2006

6.36

14.29

Swine flu

April 2009

18.72

35.96

Cholera

November 2010

13.95

5.63

MERS

May 2013

10.74

17.96

Ebola

March 2014

5.34

10.44

Measles/Rubeola

December 2014

0.20

-0.73

Zika

January 2016

12.03

17.45

Measles/Rubeola

June 2019

9.82%

N/A

 

Source: Dow Jones Market Data

 

Past performance is not a reliable indicator of future returns.

 

 

We invest for the long term, and would not typically look to move to a wholesale defensive strategy due to (what will eventually be) “noise”.  However, when markets look to be trading around historical highs, we do implement drip feeding, and in reverse, when markets look low we reverse this and would suggest to clients that they move all of their money into markets in one go.  But we remain steadfast with our conclusion that:

 

Make sure your risk mandate is correct, invest for the long-term and in line with your objectives.  Firstly, we are risk managers.  If risk is controlled properly, financial collapses should not have too adverse an impact upon your day to day living.”

 

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.






Article published: 28/02/2020

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