Episode Details

Coronavirus’ impact on share markets is a hot topic at the moment. We’ve seen global markets fall by over 10% between 21 February and 2 March 2020. It seems that the market’s sentiment shifted literally overnight from a state of being arguably ‘over-optimistic’ to being ‘very fearful’. Some of my clients have voiced their concerns about the impact that coronavirus might have on their investments. I wanted to share my thoughts on this and what actions, if any, you might take.

The share market can be a wild ride, you just need close your eyes and hang on

When the market is running hot, most investors overestimate their tolerance for risk (volatility). Often people say, “I understand that share markets can be volatile, and I’m prepared for it, let’s invest”. However, when the volatility does eventually occur, that is when you really learn about one’s appetite for risk.

We must realise that volatility is often short lived. Share markets have a volatility rate of circa 20% p.a. This means, annual returns can vary from the mean (average) return by +/- 20% from year to year. However, in the long run, there’s a strong trend of mean revision – which means investment returns in the long run are more predictable. The chart below provided by global fund manager, Dimensional demonstrates this. Market returns 5 years after a major event (e.g. crashes, terrorist attack, CGF) are positive.

And realise that you have to be in it to win it

In the face of uncertainty (i.e. higher volatility), some investors consider selling. The problems with selling is that you will likely miss the recovery. The chart below (again courtesy of Dimensional) demonstrates that your investment return between 2001 and 2018 (more than 4,300 trading days) would reduce from 7.66% p.a. to 1.76% p.a. if you missed the best 25 days over that period. In this case, you would have been better off investing in bonds, not equities.

This proves that you need to remain invested throughout good times and bad. The first rule of investing in my book

Investopoly, is to ‘play the long game’. If you applied this approach when you first invested in the share market (i.e. a diversified portfolio of low-cost, rules-based investments contructed to maximise long term returns), then you must have faith that it will work. And it will, if you’ve done it correctly.

The practical impact of the coronavirus

It would appear that the coronavirus is essentially a highly contagious form of influenza. Therefore, as long as you are in good health, its unlikely to be life threatening and mortality rates will remain contained. As such, I think the biggest impact that the virus will have is that it will adversely impact the mobility of people. For example, people will reduce or eliminate discretionary travel, they may curtail shopping and social activities and, in some circumstances (e.g. in China), businesses may cease trading because workers cannot (or are unwilling) travel to work.

This will most likely have a negative impact on economic growth in at least the first half of 2020, although growth is likely to still be positive. China has a much bigger economic footprint than it did in 2003 during the SARS outbreak, as depicted in the chart below (provided by Fidelity). Australia exports a large amount of natural resources to China. Demand for these might reduce temporarily. However, the good news is that stockpiles (inventories) are relatively low and the Chinese government may have to deploy fiscal stimulus (increase government spending) which should underpin the demand for Australian resources in the medium term.