The news flow on the COVID-19 coronavirus took a more negative tone over the weekend of 22/23 February, and we have started this week with a sizeable risk-off move.
While the number of reported cases and fatalities in China has continued to slow, the spread of the virus to other countries has become a growing concern. This is particularly true in the case of Italy, where a significant outbreak has led to 50,000 citizens being quarantined across several towns in the regions of Lombardy and Veneto.
There are also less attention-grabbing stories beginning to circulate about the impact that China’s shutdown will have on the global economy – China has become incredibly interwoven in global production, providing just-in-time products and parts to industries all over the world. The relationships are extraordinarily complex and no one really knows the full extent; with global supply-chains being disrupted it is not just China’s economy that may appear to be ailing. It is still possible that these industrial impacts may cause a revaluation of asset prices.
While we think COVID-19 will come and go over a relatively short period (as was true for SARS, Ebola and Swine Flu), it is hard to assess how much impact containment efforts will have on global growth. At the very least, a short disruption in production (and growth) now looks inevitable in Q1 2020, although how broad, deep and extended it will be is very hard to assess. It is typical that types of disruptions lead to a running down of inventories and some permanent losses, although we should also expect this event to be followed by a period of rapid recovery as stocks get rebuilt to normal levels. At the same time, it seems likely that central banks will respond by easing financial conditions where they can, as we have already seen in China.
Occasional sharp pull-backs are all part and parcel of investing, and it is important to remain focused on long-term goals. Currently, our client portfolios are all operating at below normal risk levels (which has been true for while). The equities we hold have a bias towards higher quality and more stable earnings. Similarly, within fixed income, credit quality has been improved as corporate bonds have been reduced in favour of US treasuries, which are seen as safe havens. Along with the above normal cash positions, this means we have some room for manoeuvre should the sell-off persist and markets move towards our target buying levels.
Should a sufficiently strong downward move materialise, we continue to view this as a potential opportunity to buy-in to risk assets at prices that are likely to provide strong long-term returns. In the meantime, we can expect some short-term fluctuations as markets attempt to anticipate outcomes – our approach of diversification across different types of asset and different types of risk should reduce fluctuations in portfolio values. At the same time, we have confidence that our approach of seeking a variety of sources of return in the portfolio will help to limit short-term downside.
Clients of Nedbank Private Wealth can get in touch with their private bankers or relationship managers directly or call +44 (0)1624 645000 to speak to one of our investment specialists.
If you would like to find out more about how we can help you manage your investments, please also contact us on +44 (0)1624 645000.
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David is responsible for developing and delivering our investment proposition for private individuals, trustees and investment consultants. He works in partnership with our teams of private bankers in fulfilling our purpose of protecting our clients, advising them with integrity and making their lives easier.
He has over 25 years’ experience working for global blue-chip companies in both London and Jersey, and providing investment solutions to a wide variety of clients around the world. David is a Chartered Fellow of the Chartered Institute of Securities and Investment and a Chartered Wealth Manager