The Wuhan coronavirus outbreak began with 50 known cases in mainland China in December. It’s since resulted in over 78,000 known cases—2,120 fatal—across over 27 countries, with 14 known cases in the United States as of this writing. The US government has imposed a ban on foreign nationals traveling from China, a move that China’s foreign ministry has slammed as “fear and overreaction.” But with the number of cases rising by the day and the word pandemic dominating headlines, caution seems prudent at this point.
For their part, investors are growing fearful of the implications this rapidly spreading disease may have on global growth and ultimately the financial markets. Worldwide pandemic fears led the Dow to open 1,000 points lower on Monday, while the VIX, which measures global market volatility, rose 40%. Let’s take a closer look at the outbreak and how it may guide your investing strategy.
What does the coronavirus mean for equities?
Investors are no doubt thinking back to previous pandemics like SARS, which spread to over 8,000 patients over a nine-month period before being vanquished in 2003. While markets were jumpy at the beginning of the SARS outbreak, the ultimate economic effects were minimal. Growth in China dipped briefly and then rebounded; the impact on the rest of the world was negligible. But that was in 2003, when China accounted for 4% of global growth. That number has since increased to 16%. For that matter, coronavirus infections and fatalites have far surpassed those of SARS. One epidemic may not hold as many lessons for another epidemic as investors would like to believe.
Global equity performance during the SARS epidemic
For illustrative purposes only. It is not possible to invest directly in an index. Not a recommendation to buy or sell any security.
It’s difficult to predict at this point whether the coronavirus will create the global economic slowdown that the IMF fears. But it’s already disrupting supply chains around the world. Wuhan is the capital of Hubei province, a top global auto manufacturing hub. General Motors, Volkswagen, and Toyota have been forced to shut down their local factories while the city of 11 million remains locked down. Hyundai has become the first automaker to halt production outside China because of the virus; critical components built in Wuhan can’t get through to the company’s South Korea plants.
And this isn’t a problem just for automakers. Sourcing new facilities and parts at cost-competitive levels will prove challenging for any company operating in Wuhan. Companies as diverse as Airbus, Siemens, Apple, and Ericsson have been forced to delay product deliveries and set up crisis-management teams. Apple announced last week that it wouldn’t meet current quarter revenue projections; the outbreak has kept shoppers away from electronics stores and forced the company’s Chinese facilities to cut iPhone production.
What does the coronavirus mean for fixed income?
Past pandemics have followed a pattern of emergence, peak, and wane. Uncertainty of the timing and scope of the peak tends to promote risk-off behavior. This time is no different. Since reports of a sharp rise in cases in China on January 20, the 10-year Treasury yield has fallen from 1.82% to 1.58%, despite economic data indicating that the long US economic expansion will continue.
Concerned that the virus will slow the global economy, investors may be looking for central banks to step in. According to the CME FedWatch Tool, futures are predicting a 25 bps rate cut from the Federal Reserve by Q3 2020. Fed chairman Jerome Powell says to expect some economic effects in the US but adds that it’s too early to say if they’ll be persistent or material.
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How should investors deal with the coronavirus epidemic?
It’s vital to remember how early we are into the coronavirus event. Even as nations take action to keep the virus out, most experts expect the number of cases to increase, including outside of China in countries like the US. Anxiety will likely remain high as epidemiologists work to develop a vaccine and more information becomes known in the coming weeks. Both known and unknown unknowns are numerous.
It’s always important to prevent heightened emotions from driving investment decisions. Sticking to long-term objectives and maintaining healthy levels of geographic and sector diversification in your equity allocation are principles worth keeping. As China has grown into the world’s second-largest economy, its position in emerging markets benchmark indexes has become more concentrated. Diversification helps investors avert concentration of risk; the fallout of the coronavirus brings this benefit into sharp focus.
The bottom line
We can’t know just yet what the world will look like after the worst of the coronavirus outbreak has passed. What we can do is recommend that investors adopt the disciplined and diversified approach that we bring to our own portfolio decisions. Even in the face of a health crisis, disciplined investors can keep their portfolios in good shape.
Potential Parametric solution
Our Emerging Markets Strategy is designed to provide all-cap exposure to countries with the potential to outperform the index, with less volatility. Our investment process is based on mathematical principles of diversification, compounded growth, and volatility capture.
Tom Lee, CFA, Chief Investment Officer, Equities and Derivatives
Tom leads Parametric’s Research, Strategy, Portfolio Management, and Trading teams, coordinating resources, aligning priorities, and establishing processes for achieving clients' investment objectives. Tom has coauthored articles on topics ranging from liability-driven investing to the volatility risk premium. He is a voting member of all the firm's investment committees. Prior to joining Parametric in 1994 (originally as an employee of the Clifton Group, which was acquired by Parametric in 2012), Tom spent two years working for the Board of Governors of the Federal Reserve in Washington, DC. He earned a BS in economics and an MBA in finance from the University of Minnesota. A CFA charterholder, Tom is a member of the CFA Society of Minnesota.
Evan Rourke, CFA, Director, Fixed Income Portfolio Management
Evan is a municipal portfolio manager on Parametric’s Fixed Income Investment Team. He is responsible for buy and sell decisions, portfolio construction, and risk management for the firm’s tax-advantaged bond strategies. He joined the firm in 2009 (originally as an employee of Parametric’s parent company, Eaton Vance). Evan began his career in the investment management industry in 1987. Before joining Eaton Vance, he was a vice president in the tax-exempt fixed-income group of M.D. Sass Investors Services and senior vice president in charge of Banco Popular’s municipal arbitrage account. He was previously affiliated with Prudential Securities, Kidder, Peabody & Co., Paine Webber, and Municipal Arbitrage Applications. Evan earned a BA from Stony Brook University and an online MBA from the University of Phoenix. He is a CFA charterholder.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.