Wealth Management: Strategy blog – Don’t just do something
Strategy team - Kevin Gardiner (Wealth Management)
"… I have realized that we all have the plague, and I have lost my peace" - Camus
The public mood around the Wuhan virus has worsened as its impact has spread. Since our earlier post, almost a fortnight ago, clients and colleagues are clearly more concerned than they were.
How worried should we be? Existentially - significantly. Individually - not very. Financially - only a little. We still think this is probably a time to reiterate a favourite (and profitable) bit of investment advice: at times of stress, "Don't just do something, stand there."
To be human is to face a rather one-sided probability distribution. A new illness facing our species has to be a worry. The WHO and other official bodies, including governments outside Asia, have elevated their risk warnings. And who can fail to be moved by the human toll already incurred? Our perspective could yet prove hubristic.
But we can be sure that our worry is being amplified by a ruthlessly efficient media, whose advertising revenues are at risk after macro disaster failed to materialise (again) in 2019.
One thousand deaths (and counting) is a thousand too many, but adds less than 0.002 percentage points to the annual global death rate. If fatalities eventually turn out to be ten times higher, more people globally will still die from traffic accidents, conventional flu, or US gun crime. Each year, to all causes, we lose the equivalent of the population of Italy. Epidemiologists are not suggesting this is a modern plague - or another Spanish flu.
Is there an economic impact? For sure. Customers and suppliers are being prevented or deterred from getting out. In some cases it will be significant, as our earlier blog noted: Wuhan itself may be all but closed for business; global transport (and oil demand) is being hit hard already. Even China's notoriously stable GDP data may show some damage in Q1. Food prices may jump; property prices may fall. Chinese stock prices already have: the Shanghai composite index is down 6% (though it was down more at one stage). Global bonds - safe haven assets - have rallied.
But the measures taken by the authorities - and consumers - will also result in some spending that would otherwise not have happened (helped in some cases by those lower oil prices). And the spread of infectious disease has a natural lifespan: after an exponential surge, contagion slows, and we may not be far from this phase now. The economic impact will likely be brief, followed by a pronounced rebound. Some spending will turn out to have been postponed, not cancelled.
Can we quantify the likely market impact? If Global Inc were to lose, permanently, one month's net income, a crude estimate suggests its present value might be cut by around ¼%. Even in today's low-volatility markets, this is well within the bounds of 'normal' fluctuation.
Markets might overreact, of course: it has been known. But we do not want to follow them down (or "do something", in the context of the advice cited above). If they do sell off more markedly, we would see this as an opportunity to go the other way and add to our global equity positions. As things stand, valuations in China have likely improved markedly.
We do not favour tactics over strategy, but our short-term top-down advice recently leaves us overweight cash, not stocks, and underweight bonds, which we saw as prohibitively expensive to begin with. As noted in the earlier post, we'd thought stocks had previously run a little too far too quickly. China notwithstanding, the global index is actually higher now, despite the worsened mood.
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