Over the last week, global equity markets have declined by more than 9%, giving away most of their gains over the last 6 months. This follows news that the coronavirus (renamed COVID-19) has spiked in Italy, South Korea and Iran. By Wednesday (26 February), total worldwide cases had passed 80,000, with more than 2,700 deaths attributed to the virus, which is now evident in 33 countries. Despite China’s best efforts to contain the outbreak, the coronavirus has established itself in Europe, Asia and the Middle East and the crisis will be more prolonged than markets had previously hoped.
Central banks and governments will support their economies through loose and, if necessary, looser monetary and fiscal policy, however, these policy responses are designed to boost demand and will not be that effective if factories remain closed and the supply chains grind to a halt.
The evidence from similar outbreaks suggests that any shortfall in economic activity should be followed by a quick economic recovery and this remains the view of most economists. Markets should continue to be supported by favourable monetary and fiscal policy, therefore, the decline in risk assets should recover, although no one knows whether the crisis will get worse before it will get better.
The well-known US investor, Warren Buffett, has recently been quoted, “You can’t predict the market by reading the daily newspaper”. To summarise, long-term investors are best served by retaining their existing equity positions.