Coronavirus and the risks of investor panic

13/03/2020

Around the world, headlines in early 2020 have been dominated by the outbreak of coronavirus in China. As the virus has spread globally and taken thousands of lives, it has dealt a significant blow to global stockmarkets.

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“Stocks Have Worst Day Since October Over Coronavirus Worries”, wrote the New York Times on 27 January 2020. Indeed, from the point when stories concerning the virus began to pick up on 17 January, the FTSE 100 of the largest UK-listed shares fell by as much as 5.3%.

Investors’ longer-term fears concerning the effects of the virus were reflected in the Bloomberg headline of 1 February 2020, “Coronavirus Has Eclipsed Trade as Global Economy’s Biggest Threat”.

But despite the clear impact that the epidemic has had in China, the world’s second largest economy, are global investors right to be quite so worried about its long-term effect?

The epidemic of worry

At times like this, for all of us, there is inevitably always a temptation to panic. After all, if the coronavirus causes fatalities on the scale that some commentators imagine, it would not only be truly tragic, but the implications for the global economy would be profound.

In a worst-case scenario, we could see a global economic recession that would lead to much lower corporate profits and many companies failing altogether. However, we must keep perspective.

After all, this is not the world’s first deadly epidemic. Nor is it the first time the stockmarket has been moved by one. During the past decade, share prices were affected by viral outbreaks of Zika and Ebola – twice – among several others. However, historic patterns show that the effects have often proved temporary, with only minimal long-term impact, if any.

A recent study by Charles Schwab looked at global equity performance (as measured by the MSCI All Country World Index of the world’s largest listed shares) after previous epidemic outbreaks. The study indicated that any effect over a one-month period did not persist over a longer timeframe. One month after the 2014 Ebola outbreak, for instance, global markets were down by 0.1%, but they were up by 4.4% after six months. After the 2018 Ebola outbreak, the MSCI ACWI was down 7.5% after one month but only down 3.5% over six months.

Of course, there will have been other factors driving markets during these periods, as there are today. Nonetheless, this study does illustrate how initial concerns can abate over time, perhaps as the picture becomes clearer and the worst-case scenario is averted.

We cannot know how the coronavirus will continue to affect markets, and we cannot rely on the past as any guide to what will happen this time. Remember, past performance is no guide to future performance.

Keeping a long-term perspective

So, what can investors learn from all of this? A key lesson from the sharp market fluctuations that have accompanied past epidemics is that panic-selling can prove costly. If you had sold your investments during earlier outbreaks and then missed out on the subsequent recovery in prices, you would have likely ended up worse off. After all, it is notoriously difficult to try to time the market and buy back in at the right moment.

For professional investors, however, market turmoil created by ‘episodes’ like this can provide opportunities to generate returns for their clients. Where fund managers are looking for prices to be moved away from their ‘fair value’ by emotions, they can look to capitalise where they perceive assets to be oversold. By staying objective and focusing on the fundamentals, they can invest in long-term value opportunities where they arise.

We may not know how the coronavirus will further shape global markets, but we can learn from previous mistakes. Rather than getting caught up in the initial panic, it is important to keep perspective and focus on your long-term goals.

Please bear in mind that M&G are unable to give financial advice. The views expressed here should not be taken as a recommendation, advice or forecast.

The value of any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.