COVID-19 and the reaction of markets to pandemic fears

Covid 19
  • 9th March 2020

Global equity markets have taken a significant hit in the last week, as investors started to take news of COVID-19 spreading beyond China to the rest of the world more seriously.

Global equity markets have taken a significant hit in the last week, as investors started to take news of COVID-19 spreading beyond China to the rest of the world more seriously.

As you would expect, we have been actively talking to the relevant investment managers to obtain their views and thoughts. A good starting point is to consider the historical impact of previous pandemics on global investment markets, as well as assessing some of the likely outcomes we can expect this time round.

The chart below (from Alpine Macro and Charles Schwab) shows when those episodes occurred in relation to global equity market returns. The data suggests that past epidemics have not resulted in any significant or long-lasting damage to global stock prices. While certain economies and markets have been negatively impacted for short periods, most of these potential worldwide pandemic threats have proven to be just that – potential.

So what do the investment houses view as being different this time?

In comparison to those flu-type outbreaks, the news coverage and the extent of preventative action from governments have been of a different order. Indeed, it is the preventative action that mostly affects economies and financial markets.

Global manufacturing supply chains have been affected by much of China’s extended lay-off since the beginning of the year. That said, the clearest global impact of the COVID-19 outbreak so far has been on travel and events. The Six Nations Championship rugby match between Italy and Ireland (due to be played in Dublin on 7 March) is expected to be postponed, while several Serie A football matches in Italy are likely to be played behind closed doors. Conferences a month from now, especially those involving international participation, have been cancelled. There are even questions being asked as to how the Tokyo Olympics in August might be affected.

Companies are revising down expectations, and investors expect policymakers to show their hand

The revenues and profits of many companies will be lower in the coming months. Today, Diageo has warned investors that revenues will be lower than expected for this fiscal year, a decrease of about 1-2%.

However, while bank share prices have fallen slightly more than the overall markets, they are not yet signalling fears of a systemic credit issue. Indeed, government bond yields have experienced a sharp fall, accompanied by a growing expectation of interest rate cuts and monetary intervention from central banks. Institutional investors now see a high likelihood that US rates will be cut by 0.25% within two months.

The probability of policy action to offset economic weakness is likely to support markets in the short-term and potentially provide fuel for a sharp bounce in future activity, most likely in the second half of 2020. That, in turn, should see company earnings expectations return to the levels that were expected a few weeks ago, and perhaps surpass them.

Reasons to remain calm and stay positive

Yes, COVID-19 is worryingly contagious. However, most flu-type viruses are seasonal, dissipating through spring in the northern hemisphere. Despite the widening of the infected area in recent weeks, the rate of infection has slowed overall and the WHO has not changed its view that COVID-19 will follow this path, even if it may yet be classed as a pandemic. Action to prevent its spread will continue, and will be a burden on the global economy. Markets may be both hurt and supported by those actions.

China provides a lot of reasons for optimism, having taken those actions. Activity is rebounding across the country already, while infection rates have declined substantially. This positive news has been overwhelmed by cases from other countries, but does suggest that the impacts can and do pass if robust action is taken.


This bout of volatility will take some time to pass, and further stock market falls are certainly possible, even likely given the nature of the news flow. However, the investment houses all agree that there is good medium-to-long-term potential for stocks. Developments may well be positive rather than negative (perhaps the arrival of an effective drug) and trying to time any risk reduction (and increase) threatens to destroy value for investors rather than protect them.

We always aim to keep clients abreast of current risks but recognise that long-term investment must mean not over-reacting to them. Selling in a panic is never a good strategy. What the investment houses believe is that when this crisis is blown over, the world economy will be left with plenty of monetary and fiscal stimulus, and much reduced interest rates.

Now is a good time to carry out some housekeeping. Re-visit those portfolios that have become pregnant with Capital Gains and discuss the opportunities to re-balance, discuss the appropriate tax wrappers and where appropriate review the opportunities to make gifts for Inheritance tax purposes whilst asset values are lower. To discuss this further, do contact us.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.

Tax treatment is based on individual circumstances and may be subject to change in the future.

Tax planning is not regulated by the Financial Conduct Authority.

Any news or resources within this section should not be relied upon with regards to figures or data referred to as legislative and policy changes may have occurred.

Information contained within this article is not a personal recommendation of Forrester Boyd Wealth Management. The wording in this article is not to be construed as an offer or advice. We recommend you seek advice concerning suitability from your investment adviser.