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How long before financial markets stop fearing the coronavirus?

Markets have tanked as fears about the coronavirus spread. Some sectors will certainly take a hit. But long-term investors shouldn't bee too worried, says John Stepek.

Markets around the world have taken a hit

I’ve been pointing out that coronavirus is a scary thing, but not something to be too concerned about for your portfolio. Of course, by the end of the day yesterday, markets had all tanked and the headlines were blaming it on said coronavirus. So should you worry about it now? No – this is just what happens.

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But one way to avoid feeling stressed about news events is to understand them better. So let’s unpick what’s going on.

How hard could the coronavirus hit?

News about the coronavirus is fast-moving, and with the internet being what it is, there are plenty of conspiracy theories about it being much worse than anyone is saying.

This stuff always happens. People who knew literally nothing about epidemiology become experts overnight then start jumping on social media to point out “unique features” or “unusual patterns” of the latest virus. Others who’ve read too much World War Z are just itching to appear in their own little apocalypse drama.

To be very clear, I know nothing about epidemiology. To quote the analysts at Gavekal though, this particular coronavirus does not appear “to be an unusually lethal example of the type, and it is highly unlikely to become a deadly global pandemic”. I’m going to go with that assumption until there’s a clear reason to change that view. So what are the issues in that case?

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John Authers makes the good point on Bloomberg that markets already felt jittery about growth. The coronavirus has amplified these fears for good reason. This will be disruptive to the Chinese economy, no doubt about it.

Once upon a time, not so very long ago, disruption to the Chinese economy didn’t really matter on a global scale, but that’s no longer the case. China is now very important to the global economy – if Chinese growth slows then the rest of the world feels it.

From an economic perspective, there are both good and bad points about the outbreak happening at Chinese New Year. On the one hand, Chinese businesses would have shut down at this point for a time anyway. Notes Gavekal: “If China’s suspension of normal travel is relatively short, it is not likely to have much impact on industrial production and the overall business cycle, since the usual seasonal slump for the holiday is already under way.”

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On the other hand, any company that relies on consumption and tourism is going to take a very big hit. Tourist attractions have been shut down, public celebrations cancelled, and all of the holiday-related events and trips aren’t things that can be postponed – they just won’t be taken at any point. What are the implications?

On a sector-specific basis, I would expect the travel and leisure sector to struggle for now. But in the longer run, that’ll be very much a stock-specific story – who has the most exposure? From a generalised global growth point of view, the effect on industry is probably more significant. If a major hit to this side of things can be avoided, then it’s quite possible that the slide in both copper and oil is an over-reaction.

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On the flip side, of course, we have the fact that this will now put pressure on the Chinese central bank to loosen monetary policy. The bigger the hit to the economy, the more likely we are to see monetary easing in response. It’s hard not to imagine the markets having a knee-jerk positive response to that, just as they’ve had a knee-jerk negative response to the outbreak.

Want to know when the panic is about to burn out? Watch the headlines

In terms of how long the panic might last, this is partly about the news cycle and partly about how long it takes for the market to get a handle on just how bad the outbreak is. History (as measured by a very small sample size of previous outbreaks, so take it with a big pinch of salt) suggests that effect on the market of these outbreaks tends to peak once they hit the cover of The Economist, notes behavioural investing specialist Peter Atwater, of Financial Insyghts, via Authers.

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This is a manifestation of the “magazine cover” indicator – the theory that once a piece of news is big enough to make the cover of a mass circulation generalist magazine or newspaper, its implications must be entirely "priced in” to the market.

(This is not to pick on The Economist. It’s not about the quality of the coverage, simply about the exposure it gets. I have a lot more on the magazine cover indicator in my book on contrarian investing, The Sceptical Investor – you can get it here for 40% off, using the code SCEPTIC40.)

So I’d keep an eye out for that – I’d be surprised if it doesn’t happen in the next couple of weeks, or perhaps even this Friday. But overall, as I said yesterday, while the headlines are unnerving, this is not an issue that long-term investors should spend a great deal of time on. If your portfolio is set up in such a way that these sorts of events are genuinely causing you sleepless nights, then you really need to revisit your strategy.

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