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

Markets around the world are falling and businesses in each country and sector are being affected – no one is immune.

For these reasons, it is more similar to the global financial crisis (2008) than to either the Chinese equity crisis (2015) or to the September 11 terrorist attacks.

Unlike the global financial crisis (GFC), which only directly affected financial markets but not people’s ability to go to work or company’s ability to physically produce products, COVID-19 has the potential to shut down entire swaths of industries and therefore may have an even larger impact on global markets.

At this point, we can not rule out equity losses of more than 50 per cent.

Large downturns like these often see securities’ prices dropping together in lockstep, regardless of the companies’ fundamentals, profit or potential.

Known as “correlations going to 1”, this was last seen during the GFC when virtually every security moved in tandem with every other security: straight down.

In such a scenario, no sector, country or factor is safer than any other.

What can we expect from here?

As of 1 March, governments around the world are starting to prepare people for containment measures.

UK Secretary of State for health and social care, Matthew Hancock, describing the government’s plans to battle COVID-19, said that “nothing is off the table” and that the emergency battle plans include banning large events, closing schools, dissuading people from using public transit and urging people to work from home.

If other developed governments follow suit, productivity, sales and profits from all companies worldwide may suffer a sustained and prolonged retraction before the virus runs its course.

Fast course: The V-shaped recovery

Reports from China indicate that they may have reached the peak of new cases, as those numbers are now declining.

This may give us a timeframe for the virus’s impact when coupled with strong government containment practices: about two to three months. 

Since the virus was first detected three months ago, the Hang Seng Index has given back all of its gains: about 10 per cent, most of which was lost after the virus spread past China’s borders.

If South Korea and the western GDP powerhouses – US, UK, Germany – are able to contain the virus, limiting its economic impact, we could see a “V” shaped recover: a fast drop followed by an equally rapid rise.

Unfortunately, this best-case scenario is quickly becoming less and less likely.

Prolonged course: The U-shaped recovery

Figure 2: S&P 500 crash and recovery times for both the tech bubble and GFC crashes in the past 20 years.

Perhaps more realistic is a “U” shaped recovery that still brings us back to the same levels are pre-pandemic but takes longer to achieve.