What to do as stock markets roil from coronavirus panic

European stocks are now officially in correction territory, and after the US announced a new case of Coronavirus that does not have links to any other outbreaks, stocks have fallen sharply for the fourth day this week. The market is in full panic mode, the Vix index, Wall Street’s fear gauge is above 30.0, a level not seen since 2011. The Eurostoxx 600 is officially in correction territory and with no sign of the pathogen being contained, it is hard to call an end to this market sell off. 

However, at the back of my mind is this advice from Warren Buffet, investors should be “fearful when others are greedy, and greedy when others are fearful”. The current market environment is definitely fearful, so is now a good time to start buying shares, especially if this is the type of investing espoused by one of the greatest investors of all time? To answer this, we need to ensure we have analysed all of the risks involved, and not dive straight in. Below, we take a look at the pros and cons of this strategy and decide whether or not now is the time to be brave when others trading the markets are fearful. 

1, Global growth picture weakens 

The coronavirus is a legitimate concern for investors. While it is extremely likely to hit growth in China, which has seen large parts of the country in quarantine the best part of a month, now that cases are spreading rapidly elsewhere, the concerns are that the global economy could grind to a halt. Imagine if the US were to implement a similar lock down to China in order to prevent the spread in the growth of the virus. The global economy could hobble on with one of the top two economies in the world being out of action, but it could not cope with the two biggest economies being out of action at the same time. Analysts at Bank of America are now saying that the coronavirus will lead to global growth of sub 3% for the first time since the financial crisis, and they now expect global growth for 2020 at 2.8%, with China expected to grow at its slowest rate since 1990 at 5.6%. Goldman Sachs analysts believe that the coronavirus will lead to no profit growth at all for US corporations this year. If the global economy is stalling, and corporations are not expected to see profit growth then surely a prolonged contraction for stock markets is on the cards, especially since stocks had been at - or close to- record highs in the lead up to this outbreak.

2, Markets ignore stimulus expectations

European and US Stocks are continuing to fall even though expectations are growing that the Fed could cut interest rates again in April and then in July. Bloomberg’s world interest rate probability index suggests that globally, major central banks will cut rates by more than 2% this year, with rate cuts expected from the UK, Canada, US, New Zealand and Australia; Japan and the EU may also choose to cut rates deeper into negative territory at some stage. This is not having a calming effect on the markets, perhaps because large central banks like the Federal Reserve in the US, had been adamant, up until recently, that it would not cut rates in 2020. However, Fed chair Jerome Powell did say recently that the coronavirus is worth watching. Due to the large increase in the number of new cases that have been confirmed globally, and the accompanying large sell off in stock markets, the Fed may act differently. Stock market bulls will be hoping so, especially since the sell-off has shown no sign of abating today, the FTSE 100 is down nearly 3.7%, which is the 4th straight day of declines, and the decline has pushed this index below the psychologically important 7,000 level.  

There are not many speeches from Fed officials between now and the next FOMC meeting on 18thMarch. FOMC members Evans and Mester both have speeches scheduled for today and tomorrow, respectively, it will be worth watching out to see if either of these members suggest that they will vote for a rate cut on the back of coronavirus fears. Usually, speeches from members of the FOMC aside from the chair, do not garner much interest from traders, however, in this environment every word from the FOMC counts. Any sign that they would be happy with a rate cut next month could calm markets down in the short term. 

3, Is this an overreaction? 

Financial markets are notoriously emotional and tend to overreact to certain events: pandemics, financial crises etc. Usually, after a rough period of a few days or weeks, stock markets tend to pick up again as fears subside, and the news headlines start to focus on something else. While it is hard, at the moment, to see how the news will ever focus on anything other than COVID-19 ever again, especially as new cases spring up across the world, the truth is that this pandemic will pass us by, and be a mere blip in the history of stock market performance. If you look at long term charts of stock market indices, they tend to move higher over time, with relatively short periods of pullback. Now that some global indices are in correction territory, global bargain hunters will be on the lookout for when to dive back in and buy stocks at the cheapest possible price. So, if you are looking for stocks to fall further, make sure you do so with caution. The markets are always looking ahead, and they will soon look past the peak in the coronavirus and start to price in the pent -up demand that will follow once the virus is contained. Seasoned stock traders are always looking to the future, and after falls of the magnitude that we have seen this week, they tend to be looking for the best opportunity to enter back into the market.  

While it may not be this week, we think that four things will entice traders back into the market: 1, calming words from central bank chiefs promising more stimulus; 2, fiscal stimulus from governments; 3, signs that the number of new cases are slowing down; 4, any signs that a vaccine is getting closer to production, even if this means it won’t be ready until the next flu season. 

4, Where to look for opportunities

Right now, the obvious place to look are at stock markets. Healthcare and utilities stocks are the largest gainers across the world with Gilead sciences in the US, NMC healthcare, Rentokil and the National Grid outperforming in the UK. Building a defensive portfolio is useful for the current environment where stock markets are continuing to fall sharply, however, there are opportunities to be made elsewhere based on corporate fundamentals. Lloyds Banking Group on the FTSE 100 has fallen by more than 10% this week, yet its dividend is close to 7% per year, this may make it one of the top recovery stocks once the market has calmed down. Likewise, Imperial Brands, BP, BT, HSBC and Royal Dutch Shell all pay dividends above 7%, and all have experienced big declines this week. While some are speculating that dividends will need to be cut at some stage in the next year due to the hit to corporate profits from the coronavirus, this needs to be looked at in the context that central banks are likely to cut global interest rates this year also. You can be pretty sure that these companies will continue to have a yield above that of any major economy for the foreseeable future, even if their profit growth slows in 2020. 

Asia could outperform Europe and the US 

Elsewhere, we did note earlier this week, that Asian shares, especially in China, could outperform their global counterparts now that the coronavirus has gone global and the focus has partly shifted away from China. Falls in the Shanghai Composite have been much smaller than elsewhere this week, and the index actually posted a small gain on Thursday. Other indices in Asia have fallen more sharply this week, including Japan’s Nikkei 225, even though it has not fallen as far as some European and US indices. We would expect Chinese shares to continue to outperform other global markets as long as the virus looks like it may have peaked in China. 

Why the pound could remain out of fashion 

That said, there are some other assets out there that may continue to struggle. The obvious one is the British pound, which remains below $1.29 vs. the USD today. It has remained fairly static, most likely because of the large falls in the FTSE 100. However, the fraught trade negotiations with the EU, with the UK saying that it could walk away from negotiations, is unlikely to enamour nervous investors to buy the pound, and $1.2770 – the low from November, is now a key medium-term support level. The oil price, Brent crude is now trading at approx. $51.30, after another sharp fall on Thursday. Oil is also a risky asset price to predict at the moment due to the continued cuts to corporate profits and global growth, and it could take longer to recover than some of the stocks that we mention above. 

Overall, this has been a volatile week for markets, however there are some sound reasons why some stocks may recover. If you are brave enough to trade financial markets anytime soon, make sure that you stick with your risk management plan.