Disease 'X' vs. Your Money

What coronavirus means for the markets...

CORONAVIRUS is going global. It's only a matter of time before it's classed as a pandemic, reckons John Stepek at MoneyWeek magazine.

Markets have taken a jolt after news that Italy has seen a sudden jump in cases increased fears that we're looking at a global pandemic, rather than a China-focused or regional one.

There is also the growing concern that this isn't going away as quickly as everyone had hoped. Investors have been taking a fairly sanguine view of the virus so far. But that looks like it might change. So what would that mean for your portfolio?

On Friday, Italy had identified just three cases of coronavirus. The infection count is now up to more than 150, reported the Financial Times Monday, while three people have died.

The authorities have quarantined at least ten cities in the north of the country. The Venice Carnival was closed early. Football matches were cancelled at the weekend.

On the economic front, the north is Italy's economic engine, and the outbreak, as the FT puts it, is "in the wealthy regions of Lombardy and Veneto that make up around a third of the output of an Italian economy already teetering on the brink of a recession."

But what's really worrying people, of course, is the scope for this spreading beyond Italy. The worrying thing here is that no one is entirely sure where the outbreak in Italy came from – they can't figure out who "patient zero" is as yet. And the fact that the number of identified cases has jumped so rapidly also indicates that no one is on top of this situation.

In short, the coronavirus has gone from being a China story, to being an Asia story (as it started to spread in South Korea and Japan), to now appearing in Europe in an uncontrolled manner. So if you thought the headlines were scary at the start of the year, wait until you see what we get now.

Bloomberg is already warning me, with that peculiarly American style of Capitalising Every Single Word, that "Coronavirus May Be 'Disease X' Health Experts Warned About" (I hadn't heard of this 'disease X' up until now, but I know that I don't like the sound of it).

Anyway, you're getting the point. It does seem like it's only a matter of time before this is categorised as a global pandemic. It's also not particularly clear how much success China is having internally at stemming the spread of the disease.

Now it should go without saying – but I'll say it anyway, for the hard of thinking – that the biggest deal here is the potential human cost. But my job is to talk to you about investing, so the question for our purposes here is: what does this mean for your portfolio? If anything?

The coronavirus will have a definite impact on corporate profits, so it's logical that markets should incorporate that. The travel and tourism industry will definitely feel the pinch. Now that we have a significant outbreak in Europe, the number of people who decide to avoid catching a plane unless necessary will rise exponentially.

And the market does seem to be pricing this in rapidly. I note that the share prices of low-cost airline easyJet, tour operator Tui and British Airways owner IAG have all fallen hard this morning. Carnival is on the list of losers as well. What's trickier is the wider market impact. There's a real tension here between a number of factors.

One factor is that the coronavirus represents a significant hit to economic activity. But that hit should be temporary. By that, I mean that at some point we'll go back to "normal". Yes, it could certainly put some companies out of business and it could certainly result in the loss of activity that will never be recovered (holidays not taken, products not bought). But at some point, the coronavirus will go away as an issue and we'll be back to business as usual.

Another factor is the central bank and government reaction to all this. In effect, the market has been betting that the temporary hit to activity from the coronavirus will be offset by the reaction of the authorities. Any market panic will inspire more money printing or public spending stimulus. As a result, there's no point on selling out because in the longer run, markets will be juiced even higher than they are now.

A third factor is that stocks are really quite expensive by historic standards, at least certainly in the US (it's less cut and dried for other parts of the world). Is a stock market that's priced for perfection really the best place to be when we know for a fact that the Chinese economy has been badly disrupted for at least one quarter, if not more?

So how do you balance all of that out?

It's pretty simple really. What can you do about it? Are you going to panic, sell out and just sit in cash? If so, when do you get back in? What's the signal? If you can't answer that question (and please do write in if you can, because I'd love to hear it) then selling is a big mistake.

My view is that you should stick to your plan. The expensive markets were already expensive, even before coronavirus. Maybe the disease is the pin that pops that bubble. But maybe it's not. Either way, this alone shouldn't make a huge difference to your rationale for owning what you own.

Of course, if you don't already have a well-thought-through investment plan, then you'll be much more prone to panic. That's why you need to get one. I wrote about this in more detail last year – have a read at the second half of this piece to get an idea of what a plan might look like.

So when it comes to your investments, my view is to sit tight. In the meantime, let's just hope that someone comes up with a vaccine or cure, or that this thing starts to burn itself out.