Brexit made 2019 a tumultuous year for Britain. At key moments we sent letters/emails to clients on our thoughts on the investment implications of the varying twists and turns of the saga. With our future direction decided in the December election, we had anticipated writing far fewer such messages in 2020. We hope that you will forgive us for breaking our silence so soon in the New Year.
The purpose of this message is to address the topic of the Coronavirus, the novel strain of flu originating in the Peoples Republic of China that now appears to be established in the wider world.
To be clear at the outset, we have decided to write to you on this issue because we judge that in this interconnected world, with media transfixed by the issue, the next few weeks may prove testing to all of our peace-of-minds. A rapidly rising number of cases globally will be the focus of attention, with an unsettling new vocabulary (Pandemic) becoming common currency. Financial markets, driven partly by emotion, are likely to continue to be susceptible to bouts of volatility until the spread of the virus is contained and its effects upon economic growth prospects can be properly assessed.
So how do we navigate such difficult waters? We must start with a clear understanding of our investment positioning. Our judgment is that from a public health perspective, the issue will be capably and successfully addressed over the coming quarter and that the negative impacts on global growth stemming both from inevitable (and possibly extensive) “quarantining” will be temporary and quickly recovered.
Key to our position is a relatively sanguine judgement on the nature of the virus. COVID-19 (the World Health Organisations name for the strain) is serious but appears to be materially less mortal than initially feared – probably under 1% in Developed World healthcare settings compared to around 0.2% for seasonal ‘flu. For reference, SARs (Severe Acute Respiratory Syndrome in 2003) and MERs (Middle Eastern Respiratory Syndrome in 2012) had 10% and 30% mortality rates respectively. An additional sense of proportion can be gained from putting the current outbreak, having seen around 80,000 infections and 2800 deaths at the time of writing, in the context of around one billion people each year catching influenza globally, with between 290,000 and 650,000 fatalities depending on the severity of the strain.
The response of the governing authorities and the medical profession also gives grounds for optimism. The outbreak in China is now subsiding but the stealthily infectious nature of the virus (asymptomatic carriers can pass it on) means that the outbreak is now rapidly becoming global in scope. The lessons learned in China will help as new clusters of infection are identified and the combination of increased awareness, effective testing and the practice of normal infection-control hygiene are expected to be successful in stemming the tide elsewhere. On a longer term view, lead vaccine candidates have already been identified so that a vaccine will enter human trials well before the end of this year.
Although what we know thus far gives us little reason for enduring concern, we are certainly not complacent. Our Global Strategy process is always on the lookout for icebergs, with the possibility of pandemic being one that we have long recognised as requiring close monitoring. Recent stock market falls have reflected the dawning realisation that whatever its pathology, the institutional, political and personal imperative will be to take actions that err on the side of caution at the expense of growth until the risks subside. The impact on the global economy and corporate earnings could be material, even if short-lived.
From an investment perspective, however, experience suggests that stock markets look past one-off events and there are good reasons to believe that this will be the case again. Specifically, the foundations of the world economy are strong, with consumers, corporations and the financial system all in robust positions to absorb the shock. Furthermore Governments and financial authorities are also fully engaged in offsetting any impact that containment measures might have. In sum, the likelihood of a sharp rebound once the worst is past is also high and against this backdrop we are not inclined to try to sell down our exposures to fundamentally sound long-term investments facing short-term disruption, in the hope of being able to buy them back at lower prices when the outlook is less uncertain.
We will continually test our assumptions on the current situation, but hope that the real comfort that our clients will take is not from our judgement at any given time, but from the strengths of the three key components of our service – our disciplined investment process, time-tested portfolio construction and the experience and expertise of our people. We believe that these strengths, in combination with the personal relationships that are the foundation of our business, will continue to enable us to chart the right investment course, however stormy the seas may become.