How coronavirus fears could impact your investment portfolio
Finance columnist Mark Ting expects more short term volatility with further drops in the Chinese stock markets
Global stock markets are experiencing an uptick in volatility as investors speculate on whether the coronavirus outbreak will have long-term effects on the global economy.
So far, the North American markets are holding up well considering all the negative headlines, as both the TSX and S&P 500 remain positive for the year.
There were a couple days when we saw triple digit drops, but the selling pressure was short-lived. The indexes recovered over the next few days thanks to several high-profile companies exceeding their earning expectations.
The Chinese markets aren't faring nearly as well with China's stock market off by nearly 10 per cent since the virus took off.
Comparison to SARS, other epidemics
I'm often asked about the economic effects of the coronavirus and how it might compare to past outbreaks such as SARS.
It took six months before SARS was fully contained and during that time 8,000 people were infected in 29 countries, killing 774 people. From an economic standpoint the outbreak significantly impacted Asian economies, especially tourism, air travel, retail, real estate and food and drink industries.
Surprisingly the markets performed well following the SARS outbreak. The S&P 500 was up 20 per cent in the 12 months following SARS, and other outbreaks have experienced similar results. For example, the S&P 500 was up 18 per cent one year after the avian flu epidemic and 38 per cent after the swine flu epidemic.
That said, I don't believe there is a correlation between an epidemic and higher stock valuations. I think it was lucky timing more than anything else. As an example, SARS occurred in 2003 soon after the tech bubble burst which caused the S&P 500 to drop by 49 per cent, so markets were extremely oversold and due for a bounce.
In looking at the historical epidemics — including Ebola, Zika, H5N1, H1N1, HIV, the pneumonic plague and MERS — on average the S&P 500 was up 8.5 per cent in the six-months following an outbreak.
Hopefully history repeats itself and a year from now we can say that the coronavirus' economic effect on the North American's stock markets was short-lived.
Over the short term, I expect more volatility with further drops in the Chinese stock markets, lower oil prices and a lower Canadian dollar as the epidemic will negatively impact global economic growth and commodity prices.
Money will continue to flow into traditional "safe-haven" investments like gold, bonds, the U.S. Dollar and Japanese Yen.
Once the virus is contained and life goes back to "normal," financial markets have typically stabilized and areas of the market that might have been oversold due to panic selling recover.
With every crisis there are also opportunities. For those needing to apply for, or renew, a mortgage we are seeing mortgage rates drop as money floods to the safety of the bond market.
As the coronavirus is bound to slow down global growth, the Bank of Canada might have to cut the benchmark interest rate to stimulate our economy. This will benefit those with variable rate mortgages.
If you have a long-term horizon and a well diversified portfolio, which should include some "safe-haven" assets to dampen your portfolio's overall volatility, you should be fine over the long run.
Focus on what you can control
Rather than stressing over things that are completely out of your control, you would be better served focusing on areas that are in your control, such as updating your will, reducing debt, implementing tax-saving strategies or earning extra money. These actions will have much more impact on your financial health.
It's a little more complicated for those with investment time horizons of less than three years. It might make sense to increase the allocation to "safe-haven" assets or implement a low-volatility equity strategy.
If you work with an advisor, now would be a good time to set up a meeting to review your options.
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