by Ian Campbell
Director & Chartered Financial Planner
The world is watching with concern the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.
In the modern era, we have far greater access to world news at just the click of a button, or from flash news alerts on our phones. This is not always a good thing as newspapers and websites publish news stories that will attract readers. It can be all too easy to focus on these stories and get gloomy, disheartened or uncomfortable about the reported danger to life, society or wealth of these threats, the latest being the coronavirus.
Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. Apple announced that it expected revenue to take a hit from problems making and selling products in China. Australia’s prime minister has said the virus will likely become a global pandemic, and other officials there warned of a serious blow to the country’s economy. Airlines are preparing for the toll it will take on travel. And these are just a few examples of how the impact of the coronavirus is being assessed.
The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.
We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.
‘By failing to prepare, you are preparing to fail’ – Benjamin Franklin
At times like these, financial planners play an important role. They are a source of fortitude, patience and discipline. They help clients develop a long-term plan they can stick with in a variety of conditions. Financial planners are trained to consider a wide range of possible outcomes, both good and bad, when helping a client establish a financial plan and appropriate investment strategy. Those preparations should include the possibility, even the inevitability, of a downturn. Amid the anxiety that accompanies developments surrounding the coronavirus, decades of financial science and long-term investing principles remain a strong guide.
It is important to remember that in an efficient market current world events and investors’ views are already factored into share prices. As hard as it can be, we need to remember to keep our emotions in check, believe in the robustness of our portfolios and continue on our investment journey with a long-term view. Future news may make the outlook brighter or gloomier. No-one knows.
From a personal perspective these things are worrying but from an investment perspective, as the legendary investor John Bogle used to say, ‘This too shall pass’.