It is certainly not the norm for us to comment on market macro events. However, with so much press coverage creating concerns in the minds of investors, we thought a quick perspective would be worthwhile.
The outbreak of Coronavirus is currently roiling global markets, with investors worried about a global pandemic. Chinese cities on lockdown were worrying enough but now South Korea, Italy, and Iran are coping with viral infection. After a long period of low volatility and upward-trending markets, we are reminded that negative shocks are, by definition, a surprise to markets.
In perspective, so far coronavirus has led to 75,000 illnesses and 2,000 deaths, less fatal than the seasonal flu which in the US alone year to date has caused 250,000 hospitalizations and 14,000 deaths. The issue with coronavirus is that seasonal flu is well understood, but COVID-19 is novel so its parameters and potential severity are not known.
‘Black swan’ events like this can affect asset prices faster today than in decades past due to the social-media-driven news cycle, the interconnectedness of global supply chains, and above-average valuations. As of today, travel for both business and pleasure is cancelled, supply chains are being disrupted, and demand in parts of the economy has seized up.
In addition to the human toll, viral outbreaks burden the global economic system. When SARS hit in 2002-2003, China was 8% of all manufacturing goods exported worldwide, but now represents 19%. Supply disruptions caused by coronavirus closures will be a tougher challenge for sectors in which China has larger market shares, such as electronics & automobiles. Too, there is a risk of Chinese business failures straining the Chinese banking system.
While the Coronavirus is the principal news event today, of more concern to the general economy is rising gold prices and the narrowing of yields on the curve. Rising gold prices are typically an indicator of inflation, but also benefit from investors looking for safety during times of uncertainty. Current gold prices are at their highest level in almost seven years.
The ten-year US Treasury yield has dropped below 1.4%, down from 2.5% at the end of 2018, also reflecting the flight-to-safety brought on by the Coronavirus and investor concerns over stock valuations. However, the US economy continues to operate at full capacity, with growth being reported at a reasonable 2.1% annualized rate and unemployment near an historical low of 3.5%.
We are aware that we do not have any “edge” in making epidemiological guesses about how long coronavirus will take to abate, so we believe the best strategy is to look longer-term. It is entirely possible the market is underreacting short-term, but overreacting long-term.
In a generalized business downturn, balance sheets become pivotal. Our investment style is to own stocks of companies with solid and stable balance sheets. As usual, we will take opportunities provided by market volatility to trim exposures on stocks with full valuations, add more to stocks excessively beaten up by pessimism, and potentially add new names that decline into a favourable valuation range.
We would be happy to answer any questions you may have about the current environment or your portfolios at your convenience.
Author: Chris Page,
Laurus Investment Counsel, President & CEO
WealthCo Asset Management utilizes the pooled investable assets of our client base to make singular investments in opportunities not traditionally accessible to the general public. By providing access to opportunities once out of reach for individual investors, we have evened the playing field with the institutions that have capitalized on the value created through strategic diversification.
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