The ongoing coronavirus outbreak has the potential to leave investors “nursing big losses”, market commentators have warned, which should prompt a review of how prepared portfolios are for a hit to global growth. 
Global stock markets suffered a significant sell-off yesterday as infections surged in countries such as Italy, Iran and South Korea, pushing indices into negative territory for 2020 to date. This sell-off continued in Tuesday morning trading.
The number of cases of coronavirus, which causes respiratory disease Covid-19, has now passed the 80,000 mark – with the vast majority still in China. More than 2,600 people have died globally in the outbreak.
Price performance of stock indices in 2020
Source: FE Analytics. Performance in local currencies
The emergence of new outbreak clusters has spooked markets, with investors fearing that coronavirus is on the brink of becoming a pandemic (when an infectious disease spreads easily from person to person in multiple regions).
In its press briefing yesterday, World Health Organization chief Tedros Adhanom Ghebreyesus said the outbreak is not yet at the pandemic stage but conceded that it has the potential to turn into one and urged the world to do more to combat its spread.
Markets had remained relatively upbeat in the earlier days of the outbreak, but eToro analyst Adam Vettese suggested that yesterday’s sell-off could suggest they are becoming less sanguine.
“Investors are now waking up to the fact that the coronavirus could become a global pandemic. The ‘out of sight out of mind’ approach is now clearly no longer an option,” he said.
“The most worrying thing about the outbreak is that we have no idea how long it will last. That causes huge problems for firms that operate cross borders, such as airlines, or who rely heavily on global supply chains, such as manufacturers and healthcare companies.
“Unless governments can get a grip on the outbreak – and fast – it could be the most disruptive thing to hit markets in many years. That will almost certainly see investors nursing big losses.”
Concern over the impact of the outbreak on the global economy have prompted investors to avoid more cyclical assets like oil and other commodities, while safe havens such as gold and government bonds have benefitted.
Price performance of asset classes in 2020
Source: FE Analytics. Performance in local currencies
Nigel Green, chief executive and founder of deVere Group, noted that stock markets were around record highs before Monday’s sell-off and expects them to rebound quickly, as they have done in previous coronavirus sell-offs. However, he finds this “concerning”.
“Many investors remain complacent about the far-reaching impact of coronavirus, which is continuing to spread – and a faster pace. This will inevitably hit financial markets and investors’ complacency leaves many wide open to nasty surprises,” Green explained.
“Until such time as governments pump liquidity into the markets and coronavirus cases peak, a near-term correction – of up to 10 per cent – is increasingly likely. We are hoping for a V-shaped recovery, but our current view is that it will be U-shaped.”
He added that investors should ensure their portfolios are “coronavirus-proofed” through adequate diversification.
Teodor Dilov, fund analyst at interactive investor, agreed that the “best antidote” for investors’ portfolios is diversification across asset classes, geographic regions and currencies.
“One option is to take at least some risk off the table, locking in gains, and to look to asset classes that might introduce additional diversification benefits into a portfolio,” he said. “This would include bonds, alongside traditional haven assets such gold. A cash alternative via short-term bond funds may be another area to focus on.”
Dilov pointed out that bonds are a common way of adding a defensive element to portfolios as they are deemed to be lower risk and tend to have a negative correlation to equities, rising in value when stock markets sell off.
He highlighted the £527m Marlborough Global Bond fund as a potential option for investors seeking to use fixed income exposure to provide some protection in a market downturn.
Three-month maximum drawdown of Marlborough Global Bond vs MSCI AC World over 15yrs
Source: FE Analytics
“It is managed by the highly experienced Geoff Hitchin, who employs a relatively cautious approach, designed to capture upside while limiting effects of market falls by investing in government and corporate bonds around the world,” the analyst said.
“The portfolio is well-diversified and includes more than 400 bond issues, spread across multiple geographies, credit ratings and duration. Currently, the fund is weighted towards UK and US bonds with sterling and the US dollar being the largest currency exposures.”
Dilov also noted that gold is a traditional hedge in times of market uncertainty and said the easiest way to gain exposure to this theme is buying an exchange-traded commodity (ETC). He pointed to the iShares Physical Gold ETC as one way to take exposure.
“Last but not least, cash is considered by many as almost completely risk-free,” he said. “However, instead of piling it in their portfolio, investors could allocate some proportion to money markets and ultra-short dated bond funds as a tactical move. iShares Ultra Short-Term Bond ETF is a passive example of such a strategy that may provide both returns and greater diversification.”
Giving more general advice on how to respond to the coronavirus-inspired market turbulence, Willis Owen head of personal investing Adrian Lowcock conceded that it can be tempting for investors to focus on the short term and sell out of holdings quickly to avoid future falls.
However, he pointed out that markets tend to over-react in the short term and price in events that have not yet happened. It is better for investors to remain calm and concentrate on their own financial goals, not what everybody else is doing.
Offering three tips for investors worried about the outbreak, Lowcock finished: “Do not panic: don’t make any rash decisions on your investments. Markets have already fallen and begun to price in the impact of a wider outbreak of the coronavirus. Remember investing is not for the short term.
“Diversify: events like this are reminder of the benefits of diversification. Shares can be sensitive to changes in sentiment whilst assets such as gold and government bonds offer some defensive characteristics which are likely to rise as many investors seek safe havens.
“Buy on the dips: try to think long term and be contrarian. Market sell-offs don’t last for ever and stock markets tend to rise over the longer term.”