The fear of the Wuhan virus is real, but sometimes emotions tend to cloud our judgements. I received several calls from anxious clients asking if the stock market is going to collapse and if the doomsday is coming.
- What is the real impact of world epidemics on the stock market?
- Should you hold cash now?
- Should you avoid investing in China?
- What are the investment opportunities ahead?
Stock markets took a hit with the China stock market losing nearly 3% on the last trading day before the Chinese New Year (scheduled to open next Monday on Feb 3) and the Global Stock index gave back all the gains since the beginning of the year.
At a time like this, rumours and hearsay are spreading faster than the virus itself. In this article, I will help you analyze the situation of the financial impact of the Wuhan virus so you can make a more informed decision.
The financial impact on the stock market is real
Let’s be clear. Your concerns over your investments are justified. You don’t need to be an investment expert to know that the potential financial loss due to the outbreak is humongous. Just imagine trying to answer these questions:
- How much is it going to cost to shut down a city or several cities?
- How much is it going to cost the airline and railway companies who will have to refund the tickets and lose revenues due to fewer travellers?
- How much will the loss be to the hotels, malls and retail shops due to the decline of patrons?
- How much is the loss to the world economy going to be which relies on China’s consumption?
In this intertwined global economy, there is a chain effect. The market has quickly identified the victims of affected companies and their share prices took a free fall. For example:
- Global airlines: Japan Airlines lost 7.9%, ANA airline lost 6%, Qantas airway lost 5% and Singapore airline lost 3%.
- Korean cosmetic makers: Tonymoly lost 12% and Able C&C lost 15%.
- Shanghai stock exchange lost 2.75% on the last trading day before the Chinese New Year.
- The world stock index has given back all the returns since the beginning of the year.
In the financial market, there is a saying, “Sell first, ask later”. Traders and speculators had no patience to hold their positions throughout the Chinese New Year.
And to be frank, nobody knows to what extent the coronavirus will impact the global economy.
Selling all your stocks is not the solution
Ask anyone who has seriously invested for many years, they will tell you that there is never a peaceful year in the stock market.
For anyone who can survive all the past stock market volatilities, they understand that there is a different perspective of the world in the eyes of the financial market and an ordinary person.
When you and I obtain information every day, it is actually full of bias, prejudice and even absurdity. The truth is often discovered from the numbers while the real money is at stake.
The financial market needs an experienced sailor to navigate in the storm of world epidemics.
In 2013, I had the honour to meet John Mauldin, one of the most well-known and admired economic observers, during an event called “Investing outside the box: dealing with the unsustainable”.
I remember vividly when he was asked, “How will humans cope with the next world epidemics?” He talked about the concept of “Human Adaptiveness”. His idea has had a profound impact on my investing journey since.
Modern civilizations as we know them have survived and evolved for more than 6,000 years. We have been through hundreds of world epidemics but none of them has stopped the human race from advancing.
If we look back at the financial market, from 1970 to till now, there were 13 world epidemics but historically, the impact on the financial markets are often short-lived. On average, the global stock market becomes generally positive once the outbreak is over.
Probably the closest comparison to the Wuhan virus is the Severe acute respiratory syndrome (SARS), which happened between November 2002 and July 2003. The outbreak of SARS in southern China eventually lead to 8,098 cases, resulting in 774 deaths, reported in 17 countries. But if we look at the financial data, the world stock market advanced 8% in 1 month and 21% in 6 months after SARS.
How long will the Wuhan Virus impact the financial markets?
I am not a medical professional, but the World Health Organization (WHO)’s decision that “this is not a global health emergency” the has said it all. (Update: WHO has declared global health emergency on Jan 30, 2020)
The reported death toll may seem scary, but we need to put the numbers into perspective.
When we hear that 6,000 people are infected by the Wuhan virus and the death toll has risen to 132 (as of 29 Jan), it may seem horrifying. However, do you know that in the United States alone, 200,000 people are hospitalized with the flu and 35,000 people die from the flu every year?
There is a saying, “Out of sight, out of mind”. Just because we do not often see the fatalities due to the flu, it doesn’t change the fact that this is happening every year.
The Wuhan Virus, now officially named 2019-nCOV, is a coronavirus which is from the same family that caused the SARS and MERS epidemics. If so, it should be seasonal, which means from April to May, the epidemic situation should resolve itself.
For your information, SARS ended in April 2003 while MERS ended in May 2013.
There is no doubt that we need to be vigilant and take extra precautions in the next few months, but this is not the end of the world. The impact on the stock market should be short term, even for China stocks.
The volatility of the stock market is understood simply because the market doesn’t like unknown.
With more information available and the recognition of the Chinese government’s efficiency and transparency (compared to the SARS period) of dealing with the outbreak, the market will soon reach its equilibrium.
The market never sleeps
Just when the media is calling for a global financial meltdown, capital is seeking investment opportunities.
Healthcare
Mask producers such as Kleannara and Monalisa have already seen their share prices shooting to the sky. At home, Singapore listed healthcare products and hospital services provider Medtecs International has seen its stock jump nearly fourfold from $0.05 to $0.20.
You may not even know that Singapore has three listed glove manufacturers. They are Top Glove Corp, Riverstone Holdings and UG Healthcare Corp. Their shares are the top gainers in the Singapore market now.
The 10% allocation to healthcare in my clients’ current portfolio should do well.
Commodities
As for gold, which I have talked about and allocated to my clients’ portfolio since the beginning of last year, it has surpassed the recent high in September 2019 and is trading at about US$1570/oz.
Infrastructures
If the situation does worsen and the global economy is hit hard, the global central governments will inevitability continue monetary easing and spending more on infrastructures. If you pay attention, the money has already moved.
Let me summarize…
The Wuhan virus reminds us that you will never know what is going to happen tomorrow but that is not a reason for you to stop investing today. Rather, you need to understand that the reason you can make money from the stock market is due to the unknown, which is called “risk premium” in finance. If there is no risk, there will be no return.
What drives future market returns and helps us navigate through all the negativity is our “human adaptiveness” as a whole. Like it or not, the Chinese government’s ability to lockdown 56 million people and build 1,000-bed hospitals in 6 days is a demonstration of this and it deserves respect and not criticism. And the world is better prepared this time compared to the SARS outbreak.
(Additional Reading: Why a foreigner should invest in China A-shares.)
If you are an investor, what you need to do now is not to follow the herd and spread the rumours, but analyze the situation carefully and form your independent opinion. Have a diversified investment portfolio and focus on exploring the investment opportunities in the next few months.
Stay healthy and good luck to all.
Most of the jump in healthcare stocks are irrational & unsustainable even in the medium term. I’d look to take some profits now & in the short term.
Current virus situation will get worse before it gets better, but no big deal generally. Likely WHO will declare it as global crisis soon. For SARS it took WHO 4+ months from the initial reports to declare as global crisis.
This time around, I’m expecting lower mortality rate compared to SARS. China is a bit more open to reporting today than in 2003, hence the numbers will be bigger & scarier. I suspect that the official SARS numbers are a gross understatement.
Anyway, the worse will likely to be around mid-Feb to mid-Mar. That’s the point of maximum opportunity …. if we can keep our heads.