In spite of the scary scenario painted in the
preceding pages, the coronavirus pandemic can present a good investment
opportunity for stock investors. If history is any guide, investors who panic
and sell off their investments, or who abandon their long term investment
strategy as a result of a pick-up in volatility often regrets that decision.
Since January of this year, the stock market has been very volatile
because of fears over the potential impact of the coronavirus pandemic on both
the global economy and society as a whole. Even though no one can predict how
long this coronavirus crisis will last, available evidence both from the media
and from the health agencies showed that local governments and federal governments
are taking important steps to prevent the spread of the virus as well as
promote confidence in both the stock markets and economy as a whole.1
Eventually, more people will eventually become aware of these governments’
actions in that direction and this will help to counter more expected negative
virus headlines.
Overall, all the financial markets across the globe have suffered their
worst period since the 2008 crash, as more investors and their clients become
concerned that the economic impact of the coronavirus crisis will be very
disastrous. Their concern is indeed logical, especially given that more than $5
trillion has been wiped off share markets globally as of the second week of
March 2020. In addition to that, the virus has continued to spread to every
continent and the number of new cases diagnosed outside China (where the
diseases started) has continued to increase. There is no doubt that a pandemic
like this could knock more than $$1.1 trillion off the expected growth of
global gross domestic product(GDP) if lasts for up to six months.2
The reason for this is simple: out of fear of uncertain future consumers will
spend less, people will be unable to work, and travel and tourism will drop
sharply, and investments (both local and
foreign investments) will fall. It is important to note here that something
similar to this has occurred during the past outbreaks, including SARS and the
swine flu.
It is worth noting that it is, at present, possible to estimate the
potential economic damage globally, due to a lack of data. Not only does data
showing industrial activity emerge slowly, but there is also another issue that
might hamper such estimates: past comparison at this time are made harder by
the changing timings of China’s New
Year. It is worth remembering that the initial outbreak in Wuhan coincided with
this annual holiday.3 There is, however, some evidence of the
crisis’s potential economic impact from some sectors, such as travel and
tourism. Take Thailand – a country that normally gets more than a quarter of
its visitors from China. As of the end of the second week of February 2020,
Thailand saw its tourist numbers drop 70 percent when compared to that period
the previous year.4
The crisis is already hammering the tourism sector, and we are
eventually going to see weaker trade which, in turn, will lead to supply chain
problems. While some businesses will be just fine, many others will be badly
affected. The airline industry, for instance, expects a 4.7 percent drop in
demand this year. If that happens, it would lead to an overall decline in
global air travel since the 2008 crash. By the end of 2020, as much as $29 billion
could be wiped off the airlines’ global revenue, with those airlines in
Asia-Pacific expected to be hit hardest.5
Car manufacturers around the world are also feeling the heat from the
crisis. According to the available published evidence, companies like Jaguar
Land Rover is currently not selling any cars in China. In fact, global car
sales might decline in 2020 - the first time in many years. To put this in
perspective, car manufacturers make use of a model known as the
just-in-time production model. Under
this production model, parts arrive at a car factory shortly before they are
needed rather than being stored on site. While some car manufacturers in Europe
less than 10 percent of their components from Asia, they could still face
disruptions. It is hence not surprising why a company like Jaguar Land Rover
started flying parts from China to the U.K. in suitcases as of March of 2020.
There is no doubt that production will eventually restart in Chinese factories
that have currently downed tools. Even if that happens, there will still be a
delay in restoring supply chains, for the simple reason that parts take about
six to seven weeks to be shipped from Asia to Europe.
The overall effect on individual countries remains to be seen. There is
no denying how bad the effect will depend on where the economic damage
lands. Simply put, companies with stronger social welfare, such as the United
States, Canada, and Western Europe can handle the effect better than the
developing nations such as the countries of the Middle East, Asia and eastern
European countries.
In spite of the scary scenario painted in the preceding pages, the
coronavirus pandemic can present a good investment opportunity for stock
investors. If history is any guide, investors who panic and sell off their
investments, or who abandon their long term investment strategy as a result of
a pick-up in volatility often regret that decision. Let me put it as simply as
I can: over the long term, the time in the market is much more important than
timing the market. Consider figure 1, which
showed how the S&P 500 Index performed for the time-frame of 1995
2018. Note that the S &P 500 Index is an index that tracks 500 widely-held
stocks in the stock market and is often used as a proxy for the stock market.6
The danger that most people likely fear the most in this era of
coronavirus pandemic is the chance that their investment loses money because of
the volatility in the market. Yes, it is true that the prices of financial
assets typically move up and down frequently, especially in a pandemic of this
type – sometimes almost violently, as we have witnessed in the past few months
in the market. Not only that, but these ups and down movements are also extremely
difficult to predict, especially when the investor is doing the prediction on a
day-to-day basis. However, figure 1 has provided the first line of defense
against losing money to every investor, because it showed that all they need
to do is to give their investment some more time to recover their value. Simply
put, figure 1 showed that even though stock prices(represented by the S &P
500 Index) and other financial assets constantly bounce up and down, the
short-term bumps smooth out over longer periods of time and reveal a
longer-term trend. In other words, so long as the investors' money was put into assets that are really creating value, the trend of prices will eventually
bounce back and show that value.7
As was noted earlier, the S& P 500 is a pretty good indicator of the overall value of the U.S. stock market because it measures the stock prices of
500 of the largest companies in America. So it is not surprising that most
people, especially the investors in America, western Europe, and Latin America,
use it to stand for the price of the entire stock market. Figure 1, which
showed that stocks generally recover over time after a bear market, revealed
one important fact: as an investor in this era of coronavirus pandemic, if the
current market downturn makes you panic and sell off your investments, you
would lock in huge losses and miss out on the recovery that would eventually
occur. As a simple way to say this is that time can be an effective defense
against the losses on your investments in this era of coronavirus. But to
benefit from this time factor, you
must be patient, and you must also have
the time to spare.
In plain terms, the coronavirus crisis has disrupted economic activity
as well as dislocated the capital markets. So it is only natural for investors
to begin to debate whether the crisis could derail the global cycle. The fact
remains that the recent sharp drops in global asset markets mean that the
coronavirus pandemic could indeed deliver a sizeable impact to global growth,
mainly in the first half of the year. Hence it is very important for any
serious investor to know or have some clear perspective on the outlook for the
full year.
In general, it is very possible that new cases and disruptions may
continue in the near term. However, it is also very obvious that global
policymakers and politicians will use easing measures and rate cuts to help
cushion the effects of the impact. It makes sense then to assume that new cases
of the virus may peak by the end of April or May of 2020. If that does
happen, then global growth could pick up in the third quarter of 2020. This is because
by then the disruptions caused by the pandemic will fade, especially given that
the global economy will be supported by accommodative monetary and fiscal
policies.8
References
1Taylor, A. (2020, March 6).
Trump Signs $8.3B Bill to Combat Coronavirus Outbreak in US. Associated
Press. Retrieved March 14, 2020, from https://apnews.com/30fc0af2ffb9320e1d8fa6bb6d8b23a1
2Vaughan, A. (2020, February
28). Coronavirus Pandemic Threatens to Knock $1 Trillion Off Global Economy. New
Scientist. Retrieved March 14, 2020, from
https://www.newscientist.com/article/2235697-coronavirus-pandemic-threatens-to-knock-1-trillion-off-global-economy/
3Hamzelou, J. (2020, January
27). New Coronavirus May Be Much More Contagious than Initially Thought. New
Scientist. Retrieved March 14, 2020, from https://www.newscientist.com/article/2231453-new-coronavirus-may-be-much-more-contagious-than-initially-thought/
4Vaughan, A., op. cit., para. 7
5ibid
6Evans, R. E., & Malkiel,
B. G. (1999). The Index Fund Solution: A Step-by-Step Investor's Guide.
New York: Simon & Schuster.
7Fullenkamp, C. (2012). Understanding
Investments. Chantilly, VA: The Great Courses.
8Ahya, C. (2020, March 15). Growth
Interrupted: 3 Coronavirus Scenarios for Investors. Retrieved from Morgan
Stanley:
https://www.morganstanley.com/ideas/coronavirus-impact-on-global-growth
9ibid
10ibid
