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MICHAEL CLOUGH | 3 FEBRUARY 2020

Unknown unknowns: the
coronavirus

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When we talk about risks to our investment outlook, we always warn of the threat of ‘unknown unknowns’, events that come seemingly out of nowhere that can’t be predicted or planned for. All we know is at some point they will arise. As all readers will be aware, two have already arisen in the early stages of 2020, firstly with the tragic incident in Iran when a civilian plane was shot down and secondly with the outbreak of the new coronavirus in China. Understandably, we have received numerous queries from clients, notably on the latter, and this Weekly Digest seeks to clarify our current stance on recent events.

A virus spreading and taking over the body's bloodstream and cells.

Though the recent developments have of course been frightening, we do think it is important to keep them in a historical context.

As at the time of writing the virus has killed 361 people, with more than 17,000 confirmed cases. Fears have naturally escalated across the globe with cases now confirmed in a host of countries where the patients had not even visited China. Indeed, last Thursday the World Health Organisation deemed the outbreak a global emergency, the sixth time it has made such an announcement since 2009. Fears also stem from the memories of past outbreaks, including SARS (severe acute respiratory syndrome) in 2003 which caused the death of 774 people, Ebola in 2014 which killed over 11,000 people and even the 1918 influenza pandemic which killed an estimated 50 million people. At this stage the current outbreak has not hit the levels of those stated previously and, without meaning to downplay the developments and acknowledging the ever- increasing number of casualties, far fewer people have died compared to the tens of thousands who die each year from seasonal flu. Though the recent developments have of course been frightening, we do think it is important to keep them in a historical context.

Sectors deemed to be most sensitive to this outbreak are luxury retailers, alcohol producers, leisure, airlines and selective commodity producers with these sectors directly impacted by a fall in customers’ propensity to consume. We are receiving regular updates from the Chinese equity managers we have met with. One has described the situation in China’s largest city: “Shanghai remains quiet with most streets fairly empty. Transport has largely stopped with people staying at home and only going out for food and other necessity shopping.” Chinese consumption, economic growth and certain company earnings are certainly going to take a hit in the first quarter of 2020, though this slump is currently only expected to be short lived, as was the case with SARS in 2003. An announcement over the weekend from China’s central bank that it has now pumped the equivalent of $22bn (net) into the economy confirms the economic significance and safe haven assets have moved to price in a negative outlook. US 10 year real yields are now sub-zero and currently sit at their lowest level since 2013. Gold has also bounced up 4% so far this year and has shown its tail risk hedging qualities. Times like this show why we typically have an allocation to the precious metal, and always to safe haven assets more broadly, in portfolios.

Sharp market moves in the crescendo of such events provide opportunities for those who can be active and nimble. Our current approach, as it has been since the outbreak of these events, has been one to not panic. We have not made any alterations to portfolios as a result. As the situation continues to unfold that of course may change as opportunities are presented. Events such as these will come up again in the future, as they have in the past, and markets will be volatile in the short term. Nonetheless we don’t believe they should distract us from our long term objectives for clients. We remain diversified across asset classes so as not to be too affected by large swings in individual companies and sectors.

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