On Wednesday 11th March, US President Donald Trump announced a new round of quarantine measures in a bid to prevent an outbreak COVID-19. Part of these measures included the banning of flights from European countries to the US. On the same day, UK Chancellor Rishi Sunak announced a round of emergency measures to support UK businesses suffering from the fallout of the Coronavirus outbreak. Soon after, the Bank of England cut interest rates to a record low 0.10%.
These actions demonstrate the economic challenge COVID-19 is presenting to major Western economies. For a virus that was initially discovered in Wuhan, China in December 2019, its sudden outbreak to over 100 countries in a short space of time has many governments, businesses, investors and consumers worried.
Schroders, a multinational asset management firm, released a report suggesting that the spread of COVID-19 will lead to global growth being 0.3% lower than previously expected. China’s GDP growth forecast for 2020 was also downgraded to 5%, and major economic downturns are being predicted in Italy and Japan. Of course, the situation is changing daily, making it difficult to predict what the situation will be like in the coming 24 hours, let alone the next month.
Comparisons to other similar outbreaks
Wealth managers often consider analogous situations to help predict what a new event might mean for the market. Comparing the current outbreak of COVID-19 to similar virus outbreaks offers some useful insight.
For example, the fatality rate of the Coronavirus is currently lower than what it was during the SARS outbreak in 2002/03. What’s more, the markets affected by SARS were able to recover fairly quickly once the virus had been effectively contained. Based on this experience, it can be suggested that once the Coronavirus is contained, the global economy will be able to bounce back from its initial loses.
However, COVID-19 appears to be significantly more infectious than previous strains of the virus, reflected by the number of cases around the world. Indeed, recent scientific predictions suggest it will not peak until the winter of 2020.
If Coronavirus is more severe, how should wealth managers respond?
As in any period of market volatility, risks and opportunities emerge. Some asset managers might look to stocks that have historically performed well during uncertain times and have ‘inherent’ value, such as gold or other tangible assets. Indeed, there are reports that the price of the precious metal could reach $2,000 per ounce for the first time ever.
Some commentators have been looking to the Global Financial Crisis (GFC) to understand how different asset classes are likely to react and recover over the coming months. While such discussions are helpful, it is also important to recognize that COVID-19 is a pandemic that is directly affecting the performance of different financial markets. In other words, it is not an economic crisis but a health issue which is having economic ramifications. Once the spread of the virus is contained, we are likely to see a much quicker recovery.
Navigating these complex times is going to require a huge amount of careful consideration from wealth managers. Whilst the outbreak is extremely concerning the governments and markets alike, and the risk of an economic downturn is real, there is no need to panic. We will no doubt see more loses on the major indices as investors react to unfolding trends. However, it is important to put into perspective the reality of the challenge we face in order to make measured decisions.
<< See also: Coronavirus And Brexit – The Key Events Investors Cannot Afford To Overlook In 2020
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