The financial markets, which had superbly ignored the coronavirus as long as it was staying within Asia, are now reacting heavily to its spreading to a number of new countries. We therefore thought we should update you about our stance, and the impact on our US equity portfolio.
Like in front of any other unexpected event, it is essential to keep looking at facts rather than join fellow investors in what often proves to be an over-reaction. In our current analysis, the facts are as follows.
- The situation is serious from a public health standpoint, as it probably has the potential to kill more people throughout the world than any other epidemic did in recent decades.
- From an economic standpoint, however, while the global impact is difficult to assess precisely as long as the virus continues to spread throughout the world, it is unlikely to cause serious damages. Part of the demand shortfall caused by China’s stalled economy will probably be offset, sooner or later, by catch up demand. Meanwhile, there is a lot of noise around supply chain disruptions, but we note that few companies that are really dependent on Chinese manufacturing have reported serious issues, more than one month after the outbreak.
As a result, while we acknowledge the risk of a much worse scenario if things move out of control on the public health side, we believe that the most likely impact of the coronavirus outbreak from a market standpoint is a temporary soft patch in global growth. Our portfolio was already positioned for a slowing economy, our stock picks overall have a limited exposure to China and we do not think it would be wise to move more defensive. Given the probability of the various scenarios at this stage, and the risk that central banks might be tempted to get involved again, such a move would be premature and even risky. We are close to the most defensive stance that is compatible with our stated investment style, and only a much more serious, imminent threat could justify breaking with this style for safety reasons.
For the longer term, this crisis will probably cause a broad review of manufacturing arrangements and dependencies, but we will have plenty of time to assess the implications.