From Wuhan, one of China’s most populous cities, the 2019 novel Coronavirus (2019-nCoV) has now spread to 74 more countries, apart from China with over 92,000 confirmed cases, 3,130 deaths and 48,451 recovered cases (as at 03 March 2020). Expectedly, the Coronavirus outbreak seems to be on everyone’s mind, alarming public health authorities, spooking the global equity markets and sinking stock markets into the red.
China’s importance in a globalized economy has dramatically increased since the 2002-2003 Severe Acute Respiratory Syndrome (SARS) outbreak, the most obvious precedent for today’s crisis that originated in the Guangdong province of China and spread to more than two dozen countries. Then, China comprised less than 4% global GDP; today, China is the world’s second-largest economy, currently accounting for 16% of the world’s GDP and contributing 24% of the global imports.
Therefore, putting brakes on Chinese factories’ output and disrupting global supply chains running through China will unavoidably have a ripple effect on international businesses, world economy and global growth. There are also concerns over consequences of the United States, the world’s largest economy, being forced to implement a lockdown similar to the one imposed by Chinese authorities.
As the novel COVID-19 strain of the coronavirus moves far beyond China’s borders, it is difficult to fully evaluate the scope and severity of the risks on investments. As the Coronavirus spreads, so do fears of a financial collapse. That fear is causing a lot of selling and a lot of losing. Notably, world stock markets have tumbled since the first death was announced on January 11.
While the only confirmed case of coronavirus in Nigeria remains the index case of the Italian citizen confirmed on the 27th February, the country can’t stay unscathed with the happenings in China—a chief trade partner to Nigeria. The Nigerian Stock Exchange (NSE) lost a whopping N308 billion (USD845 million) less than 24 hours after reporting the index case.
Investors lost N209 billion (USD573 million) on Monday 2nd March as the stock market dipped further. The price of oil, Nigeria’s major source of public revenue, has already taken hit as a result of the ongoing outbreak; there could be nothing worse for an already struggling economy, than having her source of revenue negatively impacted.
Markets do not like uncertainty, thus investors are understandably nervous with the spread of the coronavirus disease. We do not know, with certainty, how far the virus has spread and how long it might last; how much fear inhibits travel, consumer spending, manufacturing, and trade; and the capability of public health institutions to stop the spread of the virus. These uncertainties have led to increased volatility in the stock market as investors scramble to adjust their portfolios to factor in the virus’ potential for damage to the global economy and assess its further impact on asset prices.
One major question every investor should strive to answer is: Is my investment short or long term? Another is: Is there evidence linking global epidemics with long-term investment fundamentals?
No cause for alarm
Past experiences show that, in general, epidemic outbreaks tend to have temporary impacts on markets and economies. In fact, markets have short memories regarding epidemics. Markets may initially react to the uncertainty, but global equities tend to rebound after temporary decline. Besides, this isn’t the first new virus we’ve seen, and this won’t be the last. SARS, Zika, Influenza H1N1 and others have all come and gone.
This is not the time for a knee-jerk reaction as global efforts continue to combat the coronavirus epidemic. Temporary phenomenons and markets go through cycles like this. Viruses will get contained and investors will return to corporate and economic fundamentals. One of the most important things an investor can do in the face of market uncertainty is to make sure that investment portfolios are at the right risk levels. Market volatility helps build wealth over a period of time. For investments whose timelines are on the shorter side, such investments are already at a low level of risk. This insulates you from market volatility—whether it’s related to disease outbreaks or otherwise.
The lauded investor Warren Buffett advised investors not to allow coronavirus to infect their investment strategy. “It is scary stuff. I don’t think it should affect what you do with stocks,” he told CNBC’s Becky Quick in an interview that aired February 24 on “Squawk Box.”
No need for any fear-based changes. Investors are encouraged to continue disciplined investing through systematic investment plans (SIPs) and stick to their asset allocations. Panicking to sell out as markets slide would only lead to further losses. Staying the course can help handle the downturn, and potentially stay the course.
In tuning out the noise and sticking to the long-term plan, you should identify opportunities to immunize your portfolio against coronavirus and other possible similar outbreaks. Diversification premium is an investment cure for coronavirus. Having a mix of assets across sectors and geographies is the best way to ensure that one spell of volatility does not take your portfolio down.
Despite the perceived and actual threats from the coronavirus, high-quality bonds, gold and safe-haven currencies like the U.S. dollar have rallied while more production-intensive commodities like oil have suffered, as have the stocks of companies domiciled in or exposed to the affected areas. Funds focused on sheltering capital, strategic bond funds, and multi-asset funds with a cautious approach are good additions if you are looking to add diversification to an equity portfolio. The current situation should also be seen as an opportunity to invest for long-term in quality companies.
Investors are admonished to be on alert for fraudsters attempting to play into our natural emotions of fear and greed during this period of uncertainty. There have been spikes in investment opportunities with unbelievable return-on-investment and get-rich-quick schemes. At the risk of sounding like a broken record on this topic, there are no sure things or get-rich-quick strategies when it comes to investing.
While it’s unclear how many people will ultimately be affected by COVID-19, or how many weeks or months it will take to run its course, if it holds true to similar epidemics, however, it will run its course. Investors are enjoined to stay alive even as they seek to safeguard their investments from the outbreak. Standard recommendations to prevent infection spreading include regular hand washing, covering mouths and noses when coughing and sneezing, thoroughly cooking meat and eggs, etc. Also, avoid close contact with anyone showing symptoms of respiratory illness such as coughing and sneezing.