How to invest amidst the Coronavirus

This week’s article answers some of the questions we have been asked about the CoronaVirus and its impact on your investment portfolio.

How have markets reacted to the virus?

Stocks initially declined dramatically on the spread of the coronavirus. Riskier bonds declined in price while safer bonds increased in price. Oil initially declined as economists expect demand and consumption to remain weak. Subsequent to the sell off, Central Banks around the world cut interest rates and Governments pledged fiscal support as a remedy. Markets rebounded somewhat on this pledge of support. The table below summarizes these movements across the last two weeks.

What is up and what is down?

Airlines and cruise lines took the hardest hit. Norwegian Cruises, Royal Caribbean and Carnival Cruises were down 45.28%, 42.93% and 38.76% (between the outbreak and March 4, 2020). AirFrance, Lufthansa and Easy jet were down 37.28%, 26.78% and 25.76% respectively. Unsurprisingly, stocks benefitting from the virus are some pharmaceutical companies and medical device producers that make testing kits or protection gear. For example, Gilead Sciences stock was up 16% (as at March 4, 2020) on the announcement of trials testing a vaccine. Shanghai Kehua Bio-engineering Co – a company that makes pneumonia drugs and testing kits - was up 32%. Stocks of medical gear makers and vendors also rose dramatically.

Is the market overreacting?

It is difficult to say and too early to tell. Corporate earnings are expected to moderate, and global economic growth is likely to soften. The extent of these movements will depend on how long the outbreak lasts and the extent to which countries can effectively control its spread. Bloomberg Economics estimates that China’s economy will grow by just 1.2% in the first quarter of 2020, down from 6% in the 4th quarter of 2019. However, a positive response from authorities is assuaging investors.

What action do I take?

What action you take depends on your objectives and what you own. For medium to long term investors invested in bonds - If there has been no material change in the ability of the issuing company to pay interest and principal - an investor should hold on to his/her investments and not worry about the short-term price movement. If your goal is speculation - then you may be tempted to sell if you are in the money and then purchase at a lower level. However - It is difficult to know how long the sell-off will last. Market declines and increases are sharp. There is a risk you may end up buying your assets back at a higher price than where you carried them initially.

When do I buy and What do I buy?

Depends on what you are buying. If you are adding riskier assets to your portfolio (e.g. equities and high yield bonds) – you may wish to be patient - sell offs may re-occur when the economic impact of the coronavirus becomes clearer.

If you are buying higher quality assets that have been unfairly punished – there is rarely a bad time to do that. It's difficult to call a bottom amidst market volatility. It is possible that you could buy in a “dip” and prices could decline further. This should not concern long term investors who are comfortable with the viability and solvency of the company they are investing in. Publicly available credit ratings provide an initial guide for investors seeking to assess the risk of the company.

Hybrid notes issued by European corporates present good value for fixed income investors with an appetite for risk. These assets are partially correlated with equities – so they are likely to become cheaper with equity market declines.

Investors should hold on to plain vanilla, high quality bonds. These bond prices have rallied and are likely to outperform in the current environment.

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