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Multi-Asset – CIO Update – Coronavirus

Thursday, January 30, 2020

CIO Update with Will Bartleet, CIO and multi-asset portfolio manager at Pacific Asset Management

The outbreak of a new coronavirus in central China has led to an increase in market volatility. The source of the outbreak is thought to have been a seafood market in Wuhan, a city of 11 million in central China and has so far infected around 6,000 people and caused over 130 deaths worldwide. The virus has spread to 15 countries although at this stage less than 100 cases have been detected outside China.

Medical Risks
As a novel virus, risks are hard to assess, but a report in the International Journal of Infectious Diseases found it is at least 70% similar in its genetic makeup to the SARS virus, another respiratory virus that originated from China in 2002/3 which infected over 8,000 and killed almost 800 people. The report states that the latest virus “appears clinically milder” in terms of severity, fatality rate and transmissibility. However, containing the spread of the virus may be more challenging as it can take up to 10 days for symptoms to appear and there have been cases of people passing on the illness without the carrier showing symptoms at all. However, China seems to have learnt from the SARS outbreak, taking prompt action to halt the movement of over 50 million people in an attempt to contain the virus.

Global Economic Impact
It is too early to assess the impact on the global economy at this stage, but we can look back at history to see the impact of previous outbreaks. The SARS virus in 2003 offers a potential guide to the effect on the global economy: then China’s GDP fell by just over 1% whilst the effect on global growth was less than 0.1%. Each virus outbreak over the last twenty years have been different, but there are two important differences which are somewhat offsetting: firstly, China is now much more important for global growth, accounting for 17% of global GDP compared to 4% in 2003. Secondly, China’s response has been much more immediate, taking decisive action to control the spread of the virus.

The Importance of Diversification
From an investment perspective, this is an example of “unknown unknown” events that can affect global markets. It is also a reminder of the importance of diversification, which we think is important for exactly these types of events. It remains to be seen what the longer-term impact of the virus will be on the global economy and markets. The lessons of the market’s response to the SARS, Bird Flu, Swine Flu, Ebola and Zika Virus has been that volatility is typically short lived and that markets quickly move on to other issues. However, we are by no means complacent and are monitoring the situation closely.

IMPORTANT INFORMATION: Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority. The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.

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