Unfortunately, we have to address the issue of the coronavirus because it is affecting us all. The virus will most probably spread all across the world and made landfall in South Africa on Thursday last week. We do not need to discuss the details as those have been thoroughly covered by the media but we do want to look at the matter from an investment point of view.
The one thing that is certain is that your investments will be affected by COVID19 in 2020. Towards the end of 2018 we saw a slump in world equity markets which resulted in a negative return for that year, just to be followed by a 29% return on the S&P500 in 2019 (8% in SA). We were hopeful that 2020 would be another good year for equities due to the healthy state of the US economy and SA shares trading at multi-year lows. Unfortunately, due to the coronavirus, we will see at least the first half of 2020 experiencing very low or even negative growth in most countries.
History has taught us that, irrespective of the severity of the market selloff, shares always recover. During the global financial crisis in 2007/8, the S&P500 went down 57% and took five years to recover to the value before the crash (see graph below). To be fair, there were some other severe corrections during those five years, such as the European sovereign debt crisis in 2011. Do you remember 9/11 in 2001? The S&P went down 49%! Currently the coronavirus has caused the S&P to lose around 10%. Compared to history, this is still a mild correction. The problem is that we do not yet know how deep this correction will go.
As an investor there are two ways to look at it:
- You can believe that this disaster is no different from previous ones and accept that your investments will take a severe beating but after a couple of years, when you need to start drawing from your shares, they will be healthy again; or
- You can believe that this time things are different and the markets will never recover.
If you believe in number two, you have to sell all your shares. If you are a number one believer and you have cash, you should buy into weakness to enhance the value of your portfolio. We believe this disaster is no different and the coronavirus will not kill all the productive people in the world. We believe the “doomsday experts” are overanalysing the issue and underestimating medical researchers’ proven ability to develop a vaccine. They ignore the fact that even though we will see and exponential increase in the number of people contracting the virus – which will dramatically slow down economic activity and result in many weak companies going out of business – the vast majority of us will get just another bad case of “the flu” and recover.
So far, this virus is not a death sentence like AIDS in the early days, or ebola, or most cases of cerebral malaria in rural areas. Medical scientists will soon develop a vaccine and the hysteria will be over, even though the economic effects will linger for some time.