Investment Update – 28 February 2020
Stock markets have declined markedly this week, as it became clear the coronavirus (or “Covid-19“) has not been contained within China; outbreaks in Italy and Iran seem to make it more likely the virus could spread around the world. However, epidemics have not had a lasting impact on share prices in the past and many of the outbreaks shown in the graph below had much higher fatality rates than is the case so far for the Covid-19 virus. The magnitude of the reaction is also remarkable given the c.84,000 reported infections and c.2,850 deaths from coronavirus is materially less than the annual impact of influenza; flu is estimated to afflict between three and five million people each year, causing the death of between 290,000 and 650,000. We currently believe the market decline is the sort of pull-back that happens after markets have had a strong run; 2019 was a buoyant year for company shares, without significant set-backs to challenge investors’ confidence. Global company shares are now back to levels last seen in October of last year.
It is too early to estimate the economic impact of the current situation, not least because it is dependent on what medical advice is provided. Widespread school closures could exacerbate the cost, as parents take time off work to look after their children, though this may be unnecessary, as it is the elderly who appear to be most at risk. Certain companies in the airline and shipping sectors have reduced their profit expectations despite falling oil prices, but our recommended funds have a negligible allocation to these industries; they focus on high quality businesses, with strong balance sheets, which should be resilient even if the outlook deteriorates materially. We are not currently planning to adjust our long-term investment strategy.