Investor’s CIA: Stock Investing in an Era of Coronavirus

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

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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

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