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The view from Brooks Macdonald / February 2020

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Following the market volatility of the last few days I thought now would be an opportune time to offer our current thoughts.

Over the past two months, the COVID19 outbreak has spread across mainland China, and to 42 countries outside China. According to Bloomberg, currently, there are 81,234 confirmed cases globally. This is now significantly greater than that recorded from SARS (8,098 recorded cases) or MERS (2,494 recorded cases). Of 2,769 COVID19 deaths globally, less than 2% so far (54) have occurred outside mainland China.

While COVID19 appears to spread much more easily than both SARS and MERS, it also so far has a much lower mortality rate. SARS had a mortality rate of around 10%, and MERS a mortality rate of over 30%. COVID19 currently appears to have around a 3% mortality rate, although it is worth noting that the number of cases may be materially higher than reported as some mild cases may have been self-medicated, making the actual mortality rate lower. Whilst the number of new cases outside mainland China have increased in recent days, within mainland China, the rate of new cases appears to be slowing.

The human impact is clearly terrible, but it is important to keep these numbers in some context. ‘Normal’ seasonal flu (which has a mortality rate of below 1% but has high infection rates), results in up to 650,000 deaths globally each year according to the World Health Organisation. According to the US Centre for Disease Control & Prevention so far this season 29 million cases of flu have been reported in the US alone, this led to 280,000 hospitalisations and 16,000 deaths.

The medical response has also been rapid. Moderna Therapeutics has already shipped the first batches of its COVID19 vaccine which has been created just 42 days after the genetic sequence of COVID19 was released by Chinese Researchers. Furthermore, authorities in affected countries outside of China have been quick to quarantine infected areas to try and stop the virus spreading further.

Looking at the 2002-2003 SARS outbreak, the estimated impact to China’s GDP was between 1-2% points off quarterly growth rates (and around 0.1% off global GDP). But there are several important differences between then and now. One is China’s share of global GDP which in 2002-2003 was around 4%, whereas in 2018, China accounted for around 16%. Another is that with the greater integration of global just-in-time supply chains, business disruption can travel just as fast as any virus.

The sell off this week means that equity valuations have fallen at the same time as government bond yields have fallen. This increases the relative attraction of equities over the medium term which is a major factor in determining asset allocations. We therefore expect markets to begin to take some support from the ultra-low rate environment over the coming weeks.

We do not currently expect coronavirus to lead to a sustained long-term reduction in global economic activity and therefore are not shifting our strategic market view. This is quite different to the recent US/China trade war where a shift in future trade relationships reshapes global economic supply. Expectations of fiscal spending and central bank rate cuts will continue to act as a shock absorber for global risk which should provide support to equities once markets stabilise. As such we do not believe any changes to our portfolio positioning are needed at this stage.

If you have any questions regarding the above or would like to discuss this further, please don’t hesitate to contact a member of the Castlegate team on 01476 591022.