Is coronavirus panic reaching a peak yet?

As the coronavirus scare continues, John Stepek asks if the markets’ panic has been too extreme, and looks at the possibilities for investors.

China’s mainland stockmarket just reopened for the first time since the coronavirus really hit the headlines. As expected, share prices collapsed. Early in the day, the market was down by 8%, which is the biggest hit since 2015 (which is when China caused a short-term global panic).

How did the Chinese government react? With a lot of money, of course. And that’s what we can expect from here on in.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The key for investors is not the virus, but market expectations

Like every other government in the world, China wants to keep financial markets rising and citizens in jobs. When citizens have jobs, it keeps them out of trouble. When financial markets are rising, they feel richer and thus more satisfied. And given that there’s a nasty epidemic hitting the country right now, China cares even more about making sure that nothing else goes badly wrong.

Now, as I’ve pointed out – and as I’m sure you know – I know nothing about viruses and how they spread and while I’ll read about it, I can’t offer you any special insight. What I will say though is that from an investment point of view, it’s more about what’s being priced in. Has market panic grown rather too extreme, and therefore prone to being surprised on the upside, or are markets still too complacent?

Advertisement
Advertisement - Article continues below

I think it’s clear that markets have shed the complacency now. We have a clear rush for safe havens, a clear rejection of China-related assets, and a lack of a sense of exuberance in the US, despite extremely solid results from both Apple and Amazon last week (I’m going to leave Tesla out of that “lack of exuberance” tag, because it’s a law unto itself).

So is fear over the coronavirus peaking? That’s less clear. We got the “magazine indicator” confirmation this week – The Economist had the coronavirus on the cover (just a reminder – the idea is that when a mainstream, large circulation news publication carries a story on the front page, that means it’s “in the price”).

However, I wouldn’t just pile into the market on a knee-jerk basis. Instead, a better bet is to look at whether any assets have actually been hit hard enough by this shock to be worth considering buying now.

Where to invest for a post-viral bounce

So if you’re looking at areas that might benefit from the market taking a step back and deciding that coronavirus won’t be quite as bad as expected, where should you be looking?

The assets and sectors that have been hit hardest are all of those that the market considers most vulnerable to any problems with Chinese economic growth.

Commodities are a very obvious one. As Bloomberg points out, China now accounts for just over half of the world's demand for base metals. That compares to just under a fifth during the Sars epidemic in 2003. In other words, China matters a lot more today. That said, commodities – unlike global equities thus far – have also seen a proper sell-off.

Advertisement
Advertisement - Article continues below

The S&P 500, for example, has erased its gains for the year. That sounds bad, but it amounts to a drop of less than 4%. The copper price, on the other hand, has suffered a double-digit drop since the middle of January. On Friday, the price of the orange metal fell for the 13th trading session in a row. That's a record according to Bloomberg (admittedly, the comparable data only goes back for about 30 years, but even so).

That’s quite extreme. And correspondingly, the big miners have seen their share prices tumble too. Back on 20 January, Rio Tinto had rallied back to nearly £46.80 a share after last year's mid-summer wobble. It’s now trading at just above £40. BHP Billiton has suffered a drop on a similar scale.

I’m not suggesting that you dive into these things as a quick trade, but if you’re long-term bullish on commodities (which have very much been the laggards in recent years in terms of asset classes), then this may represent a decent buying opportunity. Alternatively you could opt for one of the mining-focused investment trusts if you prefer broader exposure.

The oil majors have also taken quite a knock during the past month – again, not that surprising, given that oil has also experienced a nasty sell-off (and it was already pretty unpopular). So the likes of BP and Shell might also represent buying opportunities.

Could this get worse? Of course. We can’t predict the future. But at the same time, the Chinese government is making it very clear that – as with any other economic or financial crisis in recent history – the answer will be to print as much money as it takes to prop up its markets and industry.

History suggests that unless this epidemic is much worse than anything we’ve seen in the last 50 years, then the money printing will eventually offset the fear of the virus. At that point, the market could easily turn on the spot and decide that the reflation trade is back on.

Advertisement
Advertisement - Article continues below

So now looks like a reasonable point to get some exposure to that possibility, if you don’t have it already.

On a completely separate note, if you haven’t yet filled in our survey to tell us what you think of MoneyWeek, I’d really appreciate it if you took ten minutes to do it now. We really want to hear from you!

Advertisement

Recommended

Visit/519022/money-minute-wednesday-4-december
Economy

Money Minute Wednesday 4 December: Britain's economic sentiment and American job figures

Today's Money Minute looks ahead to the UK's latest all-sector PMI survey, and America's private payrolls report.
4 Dec 2019
Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular

Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/economy/small-business/601073/furlough-what-does-it-mean-and-how-does-it-affect-me
Small business

Furlough: what does it mean and how does it affect me?

Many companies have “furloughed” employees after they have shut down because of the coronavirus. But what does furlough mean and how does the scheme w…
30 Mar 2020
Visit/investments/stockmarkets/601068/buy-stocks-for-the-long-term-but-buy-very-carefully
Stockmarkets

Buy stocks for the long term, but buy very carefully

After the wild ride of the last couple of weeks, equities are no longer expensive. But if you do decide to buy, be very, very careful indeed, says Mer…
30 Mar 2020