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COVID–19: Opportunities & pitfalls in the face of a global pandemic

11 March 2020
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Just weeks ago, in the early part of February, the world watched as COVID–19 spread from the Mainland Chinese city of Wuhan to the rest of Asia, affecting Singapore, Hong Kong, Japan, South Korea and many other Asian economies in its wake.

Borders were tightened or even shut down and there was panic across China, Hong Kong and Singapore – the 3 countries with the highest number of cases worldwide at that time but have now been surpassed by South Korea, Italy, Japan and surprisingly, Iran.1

Amidst the panic, supermarket shelves were being wiped out as ordinary people snapped up daily essentials. Shopping malls, restaurants and places that were usually crowded were eerily empty, hundreds of flights and hotel bookings were being cancelled and large–scale gathering and events are also cancelled.

Now as the situation stabilizes in China and Singapore after strong measures were put in place, suspected and confirmed cases of COVID–19 are sprouting up across the world and the same phenomenon is being replicated across many parts of the world.

What has initially been brushed off as an Asian outbreak has now escalated into a global pandemic, with the World Health Organization, WHO, raising the coronavirus threat from "very high"2 to a "pandemic" now.

As the situation continues to escalate, what could be the impact on financial markets, the economy and various sectors?

Should you as an investor be worried or are there opportunities to take advantage of?

Impact on economy & financial markets

Given that China is the first country to be impacted in the coronavirus outbreak, it can be seen as a leading indicator of what is to happen to other affected economies as COVID–19 spreads across the globe.

In the latest G–20 meeting of finance chiefs, the International Monetary Fund (IMF) downgraded the 2020 growth forecast of China to 5.6% from its earlier estimate of 6.0% in January – the lowest level of growth since 1990.3

Noting that the uncertainties are “too great to permit reliable forecasting” and many scenarios can play out depending on how quickly the virus is contained. IMF chief Kristalina Georgieva said that her institution is currently expecting China's economy to “return to normal” in the April–June quarter, and “as a result, the impact on the world economy would be relatively minor and short–lived”3

In this scenario, global growth would also be affected downward by about 0.1%.3

On financial markets, the Shanghai composite plunged 7.72% on 3rd February, the first trading day after the Lunar New Year holiday amid virus fears before closing at the 2,746.61 level.4 The Chinese market then took a few weeks to quickly rebound back to the 3,000 levels on 21st February.

Similarly, China funds such as the JPMorgan China A–Share opportunities A fund reflected a sharp drop in January to around $11.89 before surging to a high of $13.76 on 21st Feb, gaining 15.72% in just a matter of weeks and demonstrating the resilience and confidence in China's long term growth potential.

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Global equities were not spared either, though the delayed reaction to the COVID–19 outbreak came almost 3 weeks later than the Shanghai Composite, with the MSCI All–Country World Equity Index falling close to 12% from its 52–week high of 581.02 to 512.76 in just 2 weeks. Global Equity funds like the United Global Quality Growth fund, which has gained close to 23% in 2019 tumbled from its 52-week high of $1.642 to $1.496, completely erasing the gains it had for year–to–date.

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In the face of a global pandemic, it's natural to think that there will be increased healthcare spending and hence the healthcare sector should do well. However, well–performing funds like the Blackrock World Healthscience Fund as well as AB International Health Care Portfolio fund, which both registered a 3–year annualized return of roughly 9.5%, still experienced a drawdown in their Net Asset Values (NAVs) as the virus situation escalates.

If you had been an opportunist and tried to time the market in late January or early February in anticipation of a strong surge in healthcare stocks, you might be in for a big disappointment. However, current levels are starting to look more attractive if you have a long–term view of the Healthcare sector and would like to add to your portfolio.

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Finally on Gold, which is traditionally seen as a safe haven in times of turmoil, has rallied sharply from $1,556 on 4th February to $1,676 on 24th February before tumbling back down to a near term bottom of $1,567. The UOB United Gold & General Fund and BlackRock World Gold Fund also experienced similar moves.

In fact, if you had tried to “time” the market by opportunistically entering into Gold or Gold Funds, it would have resulted in some near–term losses in terms of the drawdown and impact.

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So how should investors position your portfolio in such a Black Swan event?

Would looking at past pandemics such as SARS give some indication on how Covid–19 would pan out?

When SARS broke out in 2003, it infected more than 8,000 people across 29 countries in an eight–month period, causing 774 deaths. The COVID–19, on the other hand, has infected more than 80,000 people while the death toll has risen above 2,600.5

While both viruses originated from China, China has grown from the world's sixth–largest economy to the second biggest today and the International Monetary Fund estimates that China alone accounted for 39% of global economic expansion in 2019 and 16.3% of the world's GDP. Therefore, any slowdown in the Chinese economy sends not only ripples but waves across the globe.6

Markets are now pricing in stimulus measures and rate cuts from central banks around the globe but the murkiness surrounding the coronavirus suggests traditional easing might not achieve the intended effect. The biggest threat to global growth is the impact to supply chain and industry giants including Apple, Microsoft and Coca–cola warned of hits to their manufacturing efforts.7

As global infection numbers and death toll continues to climb in the following days and weeks, we expect to see the stock market continuing its upward and downward gyration to find a bottom, until efforts to contain the virus starts to bear fruit and governments and central banks intervenes to calm the markets.

While nobody can accurately predict when is the best time to enter the market and what other impacts the coronavirus could bring, what we do know that at the end of the day, history tells us that epidemics and pandemics come and go, and that just like SARS, MERS & the Spanish flu, the impact of COVID–19 on the stock market will eventually be just a blip on the charts years and decades down the road.

Perhaps during these times of turmoil, it may be wise to conclude by revisiting Warren Buffett's Three Rules for investing in a crisis:8

  1. "Cash combined with courage in a crisis is priceless"
  2. "Don't invest in things you don't understand"
  3. "Don't try to catch a falling knife until you have a handle on the risks"

If you are not confident of timing the market, one good way is to invest in smaller tranches or set up a Regular Savings Plan (RSP) on dollarDEX to smooth out the volatility and take the emotions out of investing. It is also important to have a diversified portfolio to avoid concentration risk in a particular sector or region.

Start your no–fees investing journey with us on dollarDEX and explore close to 1,000 funds using our intuitive fund finder.

Keep calm and stay healthy. Invest wisely and prudently!



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Disclaimer

All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.

This information does not constitute an offer or solicitation of an offer to buy or sell any shares/units.
This article has not been reviewed by the Monetary Authority of Singapore.

Information is correct as of 11/03/2020.