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What does Coronavirus mean for investors?

We look at the impact of Coronavirus on stock markets and the global economy, and how investors could react.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Markets don’t like uncertainty, and there’s little doubt that coronavirus will continue to have an effect on global markets and economic growth.

We’ve seen a pattern emerge over the past few weeks. Asian markets, which open first due to the time difference, create a ripple effect, opening down on the news that more cases have been confirmed, leading to falls in European stocks, followed by the S&P 500. On Monday this week global markets were a sea of red.

There are pockets of more acute impact. Regionally, it is Asian markets which have seen the greatest falls, with the Shanghai Composite dropping 10% on 3 February. This was the first day of trading following the market close for Chinese New Year; almost every stock listed on the exchange was down, bar those involved in the healthcare and pharmaceutical sectors. But this slump was followed by a rally the next day that made back most of the losses. Today the Shanghai Composite sits at the same level it was at Christmas.

At a sector level, we’ve seen luxury goods firms like Louis Vuitton owner LVMH and Burberry, take a hit. Leisure and holiday firms such as Carnival, Wynn Resorts and Disney have also seen their share prices fall significantly.

Sectors which are reliant on trade to distribute their products are also at risk. Car makers and industrials rely on the free movement of components such as parts or materials in their construction. As and when borders are closed and sea tankers are grounded, this could impact supply chains.

Economic impact

The Chinese economy is already under strain. Industry, the production of goods for sale or export, makes up 41% of GDP, and if factory workers required to convert raw materials are unable to travel, this will inevitably slow.

Services, at 52% of GDP, covers entertainment, retail and tourism. Global corporations are banning employees from visiting China for the foreseeable future and many major airlines have cancelled all flights.

The question is not will coronavirus impact Chinese growth, but how long the impact lasts.

Ten years ago, Chinese GDP was worth $6 trillion, now it is worth $14 trillion, and makes up around 16% of the global economy. A slowdown in China will impact the global economy. The National Institute of Economic and Social Research forecasts GDP growth of 5.9% for China this year, resulting in global growth of 3.1%. It is easy to imagine both these figures being knocked off course by current events, particularly if coronavirus does take on pandemic status.

What could investors do?

While there’s no doubt coronavirus will continue to impact markets, that doesn’t necessarily mean long-term investors should be overly concerned. Timing the market is notoriously difficult, even professional investors get it wrong. Trading on news events can often lead to bad outcomes – panic selling often locks in losses, and jumping back into the market is hard to do.

Behavioural finance shows us that selling at the top and buying at the bottom goes against our herd instincts, but is exactly what you should do to maximise your chances of investing success. Of course there’s no way of knowing when or where the bottom will be, and volatility can be tough to endure. All investments rise and fall in value, so you could make a loss.

If you’re investing into an ISA or pension, with a 10-plus year view, we think the best course of action is to do nothing, and stick with it. For example, within four years both the FTSE 100 and the S&P 500 had shrugged off the losses of the global financial crisis. Although there are no guarantees this will be repeated.

That said, now is as good a time as ever to look under the hood of your investments and assess whether you have a properly balanced portfolio. Does the risk in your portfolio match your appetite and goals?

This is particularly important if your goals are shorter-term, or you are approaching or in retirement. In either case, your first goal is to shelter the money you’ve grown.

Coronavirus aside, a well-balanced portfolio should have investment in safe haven assets like gold, and lower-risk assets such as bonds. Funds focused on sheltering capital, strategic bond funds, and multi-asset funds with a cautious approach are good additions if you are looking to add diversification to an equity portfolio. And remember to always make the most of tax shelters.

Diversification – How to

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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