The Coronavirus has been in the news since the end of 2019, but markets had largely ignored it, reaching new highs since the disease first came to light. With cases now increasing outside China, investors have suddenly taken a much more negative view on its possible impact, with noticeable falls across global equity markets.
What are the risks?
While spreading fast, the disease is only marginally more dangerous than seasonal flu.
Political responses have been incredibly disruptive and not particularly effective. Largest risks are from a prolonged shut down.
We expect a temporary slow down mostly caused by containment efforts, but hopefully things recover quickly.
Small risk of supply chain disruption causing a larger shock to the wider economy.
Defensive assets in the portfolios like gilts have performed well. UK equity exposure more focused on domestic economy and less exposed to global trade.
While a global pandemic is at the extreme end of negative events, we’re always conscious that the next shock could be just around the corner. Our process is to ensure we have a balance of risk in the portfolios and positions in place to help navigate the next sell-off, correction, recession or disaster. The Coronavirus outbreak is a new and worrying development that we’re obviously very aware of, but we’re happy that the portfolios are well positioned and don’t expect to be making any changes before our regular review.
Context
The news flow is fluid and will evolve over time. If infection rates and fatalities remain stable, we think Coronavirus will stymie GDP in the short term and will be offset in the long term.
What happened?
At the time of writing, the novel coronavirus or Covid-19 had infected 77,659 and 2,699 have died. 2,490 infection cases have been confirmed outside China. Computer modelling indicates an infection rate of approximately 2.5 people each time it is spread; it seems to transmit more readily between humans than past outbreaks for SARS or MERS. We see that absolute figures are meaningless in isolation.
The recent World Health Organisation mission to China has found that fatality rates in Wuhan are 2-4 percent and 0.7% outside the province. The disease peaked 23rd January and 2nd February and since then infections have decreased, more importantly, the DNA has not mutated.
What’s are the terms we keep hearing in the press?
We are hearing the phrases pandemics, epidemics and endemics which might sound very serious, but let’s assess these in order:
Pandemic – is a phrase used to describe disease prevalent over a whole country or the world. It is the flu, common cold or tonsillitis.
Epidemic – describes the outbreak of a disease that attacks many people at or about the same time and may spread globally. Similar to Covid-19 and H1N1.
Endemic – this is when a disease spreads within a region and exists permanently, occurring over a life cycle or persistently. So, again: flu, the common cold, zika, malaria. The usual suspects.
The “strange” terms are just a method of communicating the status of a disease, but not its severity. Deaths, fatalities or mortality rates provide better context about the severity of the disease.
How bad is Covid-19 compared to other diseases?
The issues for any new disease are: evolution/mutation, infection rate, symptoms and fatality.
We noted that recently the World Health Organisation observed no mutations in the virus. Mutations occur and complicate issues: the common cold (erroneously referred to as “flu”) mutates year on year, evolving and spreading in an endemic manner. We are familiar with this endemic occurrence each year and there is very little news from the press.
Where a highly virulent strain of Coronavirus mutates and causes high relative fatalities to infection, it would have a significant global impact.
HIV is a disease that has proven difficult to fight because of its ability to mutate and hide from the immune system. Due to its inability to transmit quickly (exchange of bodily fluids), and the length of time it takes to evolve into AIDS, its efficiency has been stymied.
Ebola, a horrendous haemorrhagic fever, has decimated tribal populations in Africa. It has a fatality rate of 40% and it is transmitted though bodily fluids. The disease liquidates your internal organs, you “bleed out” and contact with the fluids results in the spread of the disease. Its inability to transfer from carrier to patient as efficiently as the common cold has limited its efficiency, nonetheless its lethality is significant
Other outbreaks of flu variants from Asia have varied in their ability to transmit and to cause fatalities. SARS and MERS did not snowball into the diseases many feared and their impact can be seen below. Their ability to spread within a population were slow, however, death rates for MERS were concerning.
Seasonal flu infects many people but has a mortality rate below 0.1%. In absolute terms this equates to 400,000 deaths a year worldwide (note the relative mortality statistic). New pandemic strains of flu can be far more dangerous: Spanish flu in 1918-19 infected 500m and killed 50m worldwide: a 10% mortality rate. It was highly virulent and mortality rates were relatively high.
In comparison to Covid-19, fatalities are 2-4% within the Wuhan province and 0.7% outside. This may indicate that cities or regions that are less hygienic, with lower healthcare and are more polluted resulted in the higher death rate.
Wuhan is a metropolitan area with 20 million people and in relation to a startling 77,659 people infected, the relative rate seems less surprising. For context, in a town of 1,000 people, only three (yes, 3!) people would be infected.
Infection and mortality rates in China seem less startling in context to the population, demographical factors and compared to other diseases.
What about the rest of the world?
The worst statistics have come from Iran where there were 61 infections and 12 deaths; that is almost 20% mortality rate. It is likely that many cases have gone undetected due to lack of testing, and again, hygiene and healthcare may be a cause of a higher mortality rate.
In other countries, the disease has spread with the same infection rate (per person) and mortality rate. Containment has been more effective in some countries but in others, the number of those infected has increased, mainly in Japan and South Korea.
Mortality rates remain relatively low and infection rates per person high using our benchmark, “seasonal flu.” If the fatality rate remains low, then this outbreak seems like a highly virulent, low mortality flu. Is it really that serious?
What does this mean for the global economy and portfolios?
There will be effects in the short and long term; ultimately it depends on the quarantines that governments impose on their economies.
With mortality rates low, authorities may decide to consider releasing the quarantines and allowing global trade to continue. This would mean that Coronavirus would end up progressing similar to H1N1 flu which is estimated to have infected 10-20% of the world population and only killed an estimated 284,000.
The impact of limiting the movement of people and precautionary measures will result in lower GDP. This will result in a build up of demand that ultimately would release when the measures are lifted. Prolonged restrictions could result in damage to the supply side, with bankruptcies to businesses globally. Ironically the damage could potentially come from authorities rather than the virus.
Market movements in the past month - 24th January to 25th February
Portfolios have held up in the turbulence we have seen in markets. The size of our Gilt allocation attracts enquiries from our clients and the allocation has held up well in the sell off.
Mid and small caps were added to the portfolios in early 2018 due to Brexit risk; they have held up well relative to large caps and this is due to their domestic exposure and lack of reliance on international supply chains.
What should we expect?
It depends on the evolution of the disease and the action the authorities take on quarantines.
The portfolios are positioned to navigate times of market stress and the Gilt anchor has limited the downside to portfolios. It has been helped by the mid and small cap investments. If markets continue to deteriorate, they should help portfolios to hold up their value.
In the short-term government actions will affect markets and will drag down GDP, but over the long term, the release of demand and effects of time will put the outbreak into context. Look back at the dot-com bear market and it now appears to be a dip on the horizon.
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About Martin-Redman Partners
We are a team of experienced Independent Financial Advisers (IFAs) who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice.
We offer expert independent financial advice throughout Cambridgeshire, Leicestershire, Suffolk, East Anglia and the South East. Many of our clients are within, or are in the surrounding areas of Cambridge, Grantham, Stamford, Bury St Edmunds, Frinton on Sea, Ely, Peterborough, Huntingdon, Cambourne, Newmarket, Soham and Oundle.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.