How markets have responded to the coronavirus

  • Explain how markets are affected by global health scares
  • Describe the best kind of stock to be invested
  • Explain how recoveries work

This new virus is especially dangerous for the elderly and for people with pre-existing health conditions who appear to have a mortality rate of about 15 per cent as compared to the overall 3.5 per cent mortality rate.

Does history have any other lessons for dealing with COVID-19?

Better analogies for estimating financial impact than previous pandemics are scenarios that include a significant element of global crises and fear, like the 2015 Chinese equity crash, the September 11, 2001 terrorist attacks and the global financial crisis.

Rather than just looking at how markets performed overall, we examined the extent to which different equity factors performed during the three global crises.

Equity factors are the fundamental drivers of stock returns.

Investment strategies often incorporate one or more of the factors as a means for deciding which stocks to invest in.

For example, the “size” factor measures the average market capitalisation of a portfolio because it is well known that small companies outperform larger companies over long time horizons.

However, small companies’ returns tend to be more volatile than larger companies’ returns.

Volatility is also a fundamental factor because it is well known that low-volatility stocks outperform high-volatility stocks.

We found that during the Chinese 2015 equity crisis, three aspects immediately stood out about how global markets responded to Chinese woes five years ago:

  • Low-volatility stocks outperformed global markets, (which lost 12 per cent in the period) by a full 8 per cent. Low-volatility stocks provided the strongest returns (smallest losses) as investor sought downturn protection.
  • Another defensive factor, Dividend Yield, outperformed the losing markets by about 4 per cent.
  • Small cap stocks, which are normally high-volatility, lost more than the broader markets.

Figure 1: Performance of global equity markets (dashed line) and the factors described in the text during the Chinese equity crisis. Low-volatility stocks (red), High-yield stocks (blue) both outperformed while small-cap stocks (yellow) underperformed during the time China flowed its equities markets with liquidity enhancing cash infusions in 2015

Source: Style Analytics.

It is worth noting that during this period, while low-volatility and high-dividend paying stocks outperformed the broader market, all strategies/factors lost money in global portfolios.

This historical period indicates that portfolios invested in such defensive stocks (low-volatility and dividend-paying) lost less money than other portfolios.

The only other historic time period we examined that offered a significant factor out-performance was the six-month period following the terrorist attacks of September 11, 2001 when high momentum stocks beat global markets by 7 per cent, even while those broader markets rose significantly.

This suggests that momentum strategies (those that invest in stocks that have recently done well) may outperform other strategies once the COVID-19 effects have dissipated and markets return to normal behavior.

The global financial crisis, which had the largest drop in equity markets of the three crises we examined, had no significant outperformance or underperformance for any of the factors.

In other words, it largely did not matter what strategy was followed or which factors were invested in: all portfolios suffered similar losses.

Historic Scenario


Market Lesson / Impact

Chinese equity crisis 2015

Direct impact to China with economic contagion and fear spreading globally

Low-volatility and dividend-paying stocks lost less than others

September 11 NYC Terrorist Attack

Direct impact to US with economic contagion and fear spreading globally.

Momentum stocks did better than the market in the 6-month recovery period

Global financial crisis

Direct impact to all countries

No strategy or factor gave meaningful protection: all portfolios lost similarly

COVID-19 has spread to be a global disease with over 50 countries reporting confirmed cases according to the World Health Organization (WHO).