After a promising start to the year in early January gains in equity markets were pared back on concerns that the Coronavirus, or Covid-19 as it is now known, would slow economic growth and reduce corporate profits. Initially its impact on markets largely depended on their proximity and economic exposure to China, with investors working on the basis that it would progress in a similar way to the 2003 outbreak of SARS, eventually petering out with limited impact on the global economy.
Its recent appearance in Italy and other countries has sparked wider recognition that the virus has spread and led to investors adopting a ‘Risk off’ stance, where more cautious investors reduce their exposure to equity markets and potential buyers step back on the expectation of lower prices. While the human impact of the virus itself is of great concern, the key focus for investors has been the ‘lock down’ response of governments. The immediate effect of this policy is not only to reduce economic activity in the areas affected but to slow or stop the distribution of components needed in processes elsewhere in the world and to reduce tourism and travel related activity, reducing activity globally.
While the eventual impact of both Covid-19 and the lock down policy is unknown what is clear is that corporate profits in the first half of the year and beyond will be lower than previously expected, justifying a correction in equity markets that were only recently hitting new highs. Should the virus continue to spread, the effectiveness of and need for the lock down policy will increasingly come under scrutiny and on any suspicion of change investors will rapidly shift to a ‘Risk on’ stance, with potentially significant gains in those parts of the market most hit by the policy.