FROM THE DESK OF

MARCUS BROOKES

  • Marcus Brookes
  • 09 March 2020
  • 5 minutes

Initial response to the coronavirus

The coronavirus COVID-19 continues to spread. The number of confirmed cases has exceeded 110,000 at the time of writing, while there has been a fatality rate of around 3%[1].

National and international authorities are taking steps to try to limit the spread and the awful consequences for victims and their families.

This has implications that go beyond the top priority of human health including those with which I deal, namely understanding the economic effects while looking after clients’ investments.

Economic implications

The Chinese took stringent measures to contain the virus, with some apparent success if the slowing contagion rates there are accurate. However, these measures included closing factories, keeping workers at home and laying off some workers.

China accounts for a huge proportion of global manufacturing output. As a result, China’s slowdown in production and delivery affects everyone.

Taking Apple as an example, as has been widely reported across international media, the company had to close all 42 of its stores in mainland China. In the meantime, the issued an investor update noting that iPhone supplies would be “temporarily constrained”[2]. In other words, sales are being dented by falls in both supply and demand.

Containment actions are being applied in other countries now as well. The consequence is that global sales, supplies and economic growth will drop as the world battles the deadly virus.

Central banks’ response

One of the responses has been provided by central banks. The one that garnered the biggest fanfare was the US Federal Reserve which lowered a key interest rate by 0.5 of a percentage point. This is a welcome move as it sends a positive message to market participants and, on a more practical level, it might help companies that need to borrow money to survive the drop in turnover.

However, we have to be realistic about its effect. Lower interest rates don’t persuade people to board an aeroplane or enable them to emerge from quarantine. The effects of the rate rise were understandable limited as a result.

What we’re doing

The bottom line is that asset prices are going to be volatile for the foreseeable future. We have seen sharp falls in equity prices and similarly sharp rises in perceived “haven” assets such as low-risk rated government bonds. This mixed performance has helped to reduce the losses experienced by diversified portfolios.

At the same time we have overseen a partial movement of money from higher-risk to lower-risk rated investments within our short-term asset allocation facility.

There are also some practical actions that we need to take as we face the realities of the virus. We have implemented company policies to help prevent and mitigate the consequences of contagion so that we can continue to serve our clients. We are also keeping in very close touch with our underlying fund managers to help ensure that our overall portfolio reaction remains appropriate.

The rest is down to time. More cases of the virus will be confirmed while we await a cure or a vaccine. Until then, we are doing everything we can and will continue to keep you informed.

Sources
[1] WorldofMeters.info, 9 March 2020; [2] “Investor update on quarterly guidance”, Apple, 17 February 2020

Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment,

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