There have been alarming headlines regarding the spread of the Coronavirus with outbreaks in Italy, South Korea, and Iran causing particular concern.
We are not epidemiologists and not in a position to predict the final extent of the outbreak. While the disease itself is worrying, we are also considering the second and third order economic impacts as a result of the measures taken to halt the spread of the virus. The closure of factories and quarantining of large numbers of people is likely to cause a slowing of economic growth. The degree of impact will depend on the spread and endurance of this health emergency.
To stimulate demand and counter a potential economic downturn, policy makers may use a combination of fiscal and monetary stimulus. China has already been utilising such measures to stimulate their economy and the Japanese have also indicated that they stand ready with financial support. We suspect many other Central Banks and governments are planning similar responses. Comparisons have been made with previous viral outbreaks, such as SARS, whereby the market recovered sharply when the outbreak was over as economic demand is merely delayed rather than cancelled.
Market reaction to the news in recent days has seen sharp falls in equity markets. Although, as I write, the FTSE 100 has stabilised back above the 7000 level with other equity markets showing similar composure. On the other hand, Government bonds and other defensive assets have been much stronger as investors seek out these safe havens.
Your portfolio will not be immune from the fall in the equity markets. However, ahead of this latest setback, we took the opportunity to reduce the equity (shares) holding in the more defensive portfolios as we believed the market had been too complacent about the early spread of the virus. The portfolios have now given up the gains previously made in 2020 although the performance over the past 12 months remains very positive.
Given the size and speed of the market move this morning, no further changes will be made at this time. The VWM Investment Committee will monitor developments and stands ready to react again at short notice if there are any further developments.
