The world is, as we are, watching with concern the spread of Coronavirus (Covid-19). Uncertainty is being felt around the globe. It is unsettling on a human level as well as from the perspective of how investment markets will respond.

Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry amongst governments, companies and individuals about the potential impact on the global economy. Earlier this week the OECD predicted that global GDP growth could now be 1.5% in 2020, which was half the rate it was predicting before the outbreak.

But what should you do regarding your investments? As always, we lean into the evidence to determine our advice.

Looking back to recent pandemics, particularly SARS helps provide context. Of course, SARS hasn’t been the only global health scare to hit the headlines in the last 20 years. The following table highlights a few of the higher profile pandemics in recent history. We have identified an estimated start date for each of these pandemics and then looked at the subsequent performance of a balanced 50 /50 model portfolio over the next three months, six months and twelve months.

The results may surprise you….

A 50/50 Portfolio has 50% allocated to growth assets and 50% allocated to cash and fixed income. Within the first few months, the performance of markets and portfolios can be mixed. During SARS, which was the first global pandemic to emerge in quite some time, the early reaction of equity markets was quite negative. During the Avian Flu outbreak a few years later, it was relatively flat.

What is even more striking is that markets within six and twelve months from the start of each of these outbreaks, regardless of their perceived severity, generally rebounded strongly.

What will happen in the weeks ahead with respect to the Coronavirus outbreak?

The truth is that no-one knows. Markets today are reflecting heightened uncertainty in the form of lower prices. As soon as there is new information (good or bad) this will also be priced in. When the tone of the news flow gradually changes from contagion to containment, and eventually cure, then market risk and uncertainty should reduce, which is likely to be positive for risky assets.

While this heightened uncertainty may be uncomfortable for investors, don’t be surprised if the Coronavirus can be added to the list of issues that might make an investor think about selling, our general response is that it’s unlikely to be a good idea to sell investments. Although we cant’s see into the future, we can observe the past and we have witnessed the best recommendation is to stay focused on the long term and maintain your strategy.

Stay Healthy, Stay Calm, Stay Focussed.

Paul Fowler