Coronavirus Uncertainty – Framing the Situation

Many are concerned that a new strain of coronavirus that has ravaged China may prompt the recession we have been expecting for so long, spreading globally and forcing factories to shut down, consumers to stay home and businesses to shrink operations. The concern has led to a newsworthy sell off in equity markets.

During times like these it can be easy to succumb to the fear currently roiling the markets, but while the coronavirus remains a threat in the short-term, we hold our positions for the long-term. That is not to say concerns around the virus are unwarranted; from a health perspective it is important to treat the situation with caution, but this is not the first crisis we have encountered as investors over the last decade, and it won’t be the last, yet here we remain.

Still, some of you may have questions as to how bad things currently are and why markets have been hit so hard, so let’s take a moment to provide a better understanding of the impact of the coronavirus.

We will start with what we know about the virus. Since its discovery late last year, we have seen roughly 96,713 confirmed cases of the coronavirus, or COVID-19 (COVI for coronavirus, D for disease and 19 for 2019), the majority of which are in China. The disease has, however, reached a total of 65 countries and caused 3,303 deaths around the globe.

While we have been aware of COVID-19 for a few months now, the sell-off has come on the back of its continuing spread, which has led to flight cancellations and factory closures, with many particularly concerned around the prolonged impact the virus will have on China and the U.S. given their roles in the global economy. China represents a quarter of global manufacturing (we’ve already seen a meaningful impact from supply chain disruptions on business activity), and the U.S. represents 43% of the global stock market.

Adding to the concern are the pre-existing conditions of the market. Corporate debt is currently high in the U.S., and the operating P/E ratio (a measure of how “expensive” the S&P500 stock index is) is currently 23.6x, above its long-term average of 15.8x. Both of these factors leave more room for companies to fall should we experience a downturn, and with interest rates already low, there’s little room for monetary policy to stimulate lending activity (although the Bank of Canada and the Federal Reserve have already cut rates by 50bps).

Clearly, things don’t look good, but let’s discuss some more encouraging information. Firstly, the number of new cases in China has been falling by the day, meaning attempts to control the disease appear to be working. Secondly, a less shared statistic; 53,610 have so far recovered from the disease. This does not mean COVID-19 is not dangerous, but it does help us frame the situation.

Of course, COVID-19 may be what pushes us into a recession, but long-term it’s impact will fade, as did that of our past debacles. This is the advantage we have as investors; by focusing on quality companies with solid financials and operations set to benefit in the long-term, we don’t need to give credibility to the short-term market fears, which we know is incredibly difficult to predict.

Of course, the situation calls for vigilance, both in terms of our investments and in terms of our health; medical professionals advise us to wash our hands thoroughly, avoid touching our eyes, nose or mouth, and follow instructions from the respective authorities. The biggest risk for investors right now however is fear, which can often tempt us into carrying out rash or emotion-based decisions rather than focusing our efforts on logical investment decisions. In conclusion, our investment team continues to monitor the potential risks of the coronavirus and we have cash reserves that both protect the downside of your portfolio and are available to take advantage of any investment opportunities.