Investment Bulletin – Coronavirus and Markets


Global stockmarkets are selling down sharply as fears of the impact of the Coronavirus on the global economy increase.

We have been taking calls from concerned clients as to whether we advise selling stocks to limit the damage should a pandemic arise. It is clearly a cause for concern. We are following events closely and can offer the following comments.

There is an article in Wednesday’s FT by Nouriel Roubini on the coronavirus and markets. Essentially Roubini is saying that markets have under-estimated the potential impact to the economy and that a recession is inevitable. Two articles this week by Ed Harrison of Credit Writedowns explain how fear is affecting monetary conditions and we are now seeing monetary signals of recession in yields – the yield curves are again ‘inverting’. Harrison thinks Central Banks will ease and cut rates, but both Roubini and Ambrose Evans-Pritchard in the Telegraph say that Central Bank response will not help a supply-side problem where chains of supply are so disrupted that cheap money makes no difference.

This is a valid point. China has become the World economic growth engine and disruption to the supply of manufactured parts for global distribution will have a knock-on effect to global output. However, Central Banks in China and the Far East have also clearly signalled their intention to supply credit to companies facing output and cash flow problems to ensure that they remain solvent and ready to recommence activity once the epidemic is under control, thus avoiding the loss of capacity to the economy.

China’s response to the problem has been drastic; they have locked down huge areas to reduce contagion. But as of today the numbers of infected cases in China are reportedly declining. Such action is therefore what is needed and appropriate. We are also seeing a similar response to outbreaks in Spain and Italy – imposing a quarantine on infected areas.

More cases and more spreading of the virus will see greater lockdown and this increases the likelihood that it affects the global economy, leading to a recession and probably an ‘L-shaped’ recovery and not the one we want – the ‘V-shaped’ recovery.

It is clear there is a rush to safety – the US 10-year yield has hit a record low of 1.29% while equities, oil, gold and currency markets all signal a ‘risk-off’ mood. There are also underlying issues relating to market liquidity amplifying downside risk.

The bottom line is that we simply don’t know how bad this could become, but in the event of further contagion the likelihood of a global recession is now extremely high – this will undoubtedly affect stockmarkets further from here.

We have looked hard at portfolios over the past year and we are comfortable with our allocations and current equity holdings. The majority of our equity exposure is in the UK and we have good funds and stocks. We have maintained that UK stocks were very good value before this crisis. A recession will bring prices and yields down further, but once the virus threat is over, stocks will recover and we will see some big moves into equities.

Our conclusion is to sit tight and keep the long-term in mind as market timing is impossible; if it gets very bad we must keep focused on the recovery. However, there is a strong possibility it is going to get worse before it gets better.

If you would like to discuss this in more detail, please call us on 01494 683100 or e-mail