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How The Coronavirus Caused One Of The Fastest Corrections In History

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

The S&P 500 has recorded one of the fastest pullbacks in history as COVID-19, more commonly known as Coronavrius, reaches pandemic proportions. With a decline of over 12% in a week, investors around the world are actively monitoring developments in the virus’s spread to ascertain what direction the market will move in next.

One thing that investors can take comfort in is that previous epidemics, including those which caused more deaths and infections than the coronavirus, never culminated in a global recession. Furthermore, the largest market decline of the back of an infectious disease was a ~14% fall over three months on the back of an ebola outbreak. The current correction started after a period where valuations were higher than historical averages, and the market rallied 10% in a short time frame. In our view, this at least partially explains why markets were so vulnerable to a pullback.

The most closely comparable precedent to the current coronavirus is the SARS epidemic, which had a much higher death rate but was less infectious, resulting in a lower overall death toll. The main other differences are the higher infection rate of the coronavirus (resulting in a higher overall death toll), increased global interconnectivity and increased importance of Asia to the world economy due to the weight of the region’s economic influence. While the SARS precedent would point to a 10% market pullback and complete recovery shortly thereafter, the differences outlined above could impact the extent of the downside.

One trend that investors can derive some solace in is the change in the number of active cases, as compared with the total number of cases (the latter of which includes patients that have fully recovered). Active cases actually fell by 19.2% over the past week worldwide, despite sensationalist media headlines. New cases in South Korea were roughly 50% lower than the day before on Friday.

While markets are reacting to the spread of the virus globally, the Chinese experience indicates that authorities can get the outbreak under control while keeping disruption to economic activity confined to a 1-2-month period. Authorities across the US and Europe also have more funding on a per capita basis and are better equipped to deal with an outbreak. We also believe that the advent of spring over the weekend, which typically brings an end to the flu season, will be an added benefit in helping contain and control the coronavirus epidemic. We also want to highlight the very low mortality in younger cohorts, as shown in the table below:

Age

Death Rate

80+

14.8%

70-79

8.0%

60-69

3.6%

50-59

1.3%

40-49

0.4%

30-39

0.2%

20-29

0.2%

10-19

0.2%

0-9

0%

 

The ASR Wealth PATS desk has a focus on mid cap opportunities, because of an underlying belief in their superior long-term return profile. We also have concentrations in tech stocks, resulting in a high beta portfolio that will often fall more heavily in downturns. Our analysis of the current situation gives us more conviction that we are tracking towards our long-term return objectives, despite the short-term selloff in some of our holdings.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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