Coronavirus and Portfolio Implications

Economic Impacts

The economic impact of the outbreak of a coronavirus strain (nCov for short) has added new risks to global markets. Although each epidemic is unique, the typical pattern is: concern builds to a point where a sharp drop in confidence and/or activity hits economic data releases (with a lag), the slowdown is discounted in markets, investors show a willingness to look through the near-term concerns and re-establish positions in risky assets.

In our view, it is too early to tell the true extent of the economic impact or when investor concern will peak, but as seen in the table below, previous epidemics suggest a buying opportunity should emerge at some point.

Cool Heads

Unexpected shocks and volatility in asset prices can push investors to trade more actively around news flow and emotion, often at their own peril. Our investment process is designed to focus on medium to long-term economic and market fundamentals and adjust our portfolio asset allocation accordingly. This does not mean that we ignore events like the coronavirus, instead we focus on how such events will affect the fundamentals.

Regional Impacts

All else equal, regionally our preference would be to focus on equity markets whose economies have both policy flexibility and are more insulated from the coronavirus threat. One such market is the United States as it is a relatively closed economy where trade contributes a smaller portion to GDP growth. Additionally, the United States can still cut interest rates if policymakers feel the need to respond to a growth slowdown.

Canada, although less susceptible to a coronavirus threat directly, has economic risk given the open nature of the economy and ties to energy prices. The Eurozone and Japan are also more reliant on trade as a contributor to growth, but unlike Canada, policymakers in these regions have less room to counteract a growth slowdown.

In the case of ground zero - China, central bank and government action has already been delivered with expectations of even more stimulus to support the economy. Still, China is a much more services-consumption oriented economy than in the past and the expected economic hit will likely be more severe as consumers retrench.

Allocation Strategy

We maintain that the broad global macroeconomic backdrop is improving, notably growth is stabilizing but China’s influence over world supply chains and its impact on tourism has dramatically increased over the past two decades. A more dramatic or sustained slowdown in China will have ripple effects regionally and globally and will need to be continually reassessed.

As far as signals, we would start to factor in a more benign outcome and thus an opportunity to add some more risk in portfolios if:

• Growth rate of new cases peaks
• News coverage peaks (based on story counts)
• Improved testing results of vaccinations
• More aggressive reactions not only by China but other Central Banks

We have used some of the short-term volatility to increase equity exposure and move more neutral in our asset allocation given more positive medium-term views but hesitate to be too aggressive at adding risk until, among other issues, more clarity emerges on the path of the virus and its broad economic impacts.

Michael Greenberg’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.