- The coronavirus that originated in China rattled stocks in the US but historically, global viral outbreaks have caused only short-term volatility.
- In the past, economic activity has been disrupted for a few months, but soon recovered.
- In the near term, the coronavirus may affect Q1 economic growth in China if it follows historical patterns.
- For investors, market volatility may be an opportunity to ensure that your investment mix continues to align with your time frame, risk tolerance, and financial situation.
Investors may be looking for help making sense of headlines around the coronavirus. As an institutional portfolio manager with Fidelity's Strategic Advisers LLC, Lars Schuster has unique insight into how a health scare can move markets and how to think about it. He recently gave an interview offering perspective on the current outbreak, a topic that may be worrying investors.
How closely is this recent virus outbreak that started in China tied to SARS (Severe Acute Respiratory Syndrome) from 2003? How did the SARS outbreak impact the global economy?
Schuster: The human toll of this virus is a tragedy, and that can weigh on any of us. It's also true that news related to disease outbreaks can be unnerving, so I can certainly relate to the anxiety that some investors might be feeling.
As an investor, though, I believe that reviewing previous related events can help put some context on what is happening today. There are some similarities between this recent virus and the SARS outbreak of 2003 in Asia, so let's look at that more closely.
During the SARS outbreak, there were impacts to global economic growth, but they were particularly tied to Asia, the region where the outbreak was primarily occurring. In other words, those outbreaks did not lead to widespread global economic contractions in the US, Europe, or other regions around the world.
Additionally, the impact tended to be strongest in a few narrow areas of the economy, such as travel, tourism, and retail spending. So looking at the current outbreak, one could imagine that travel restrictions and general concern about the illness would affect those areas of the economy in China.
How significant was the impact of SARS on Chinese economic growth?
Schuster: The impact seemed to affect a few months of activity, but then the economy started to recover. For example, the outbreak led to slower retail sales in China in the second quarter of 2003. But by the third quarter, things seemed to have normalized, as the outbreak started to run its course.
Nobody can predict what the current outbreak will lead to, or how long it may last. But looking at history, it’s logical to think that this could be a short-term event for the global economy.
How is the economy in China doing now?
Schuster: Economic growth in China was slower than normal in 2019. However, late in the year, the economy started to show signs of recovery. The initial trade deal that the US and China signed earlier in January also helped. At the very least, it signaled that the trade dispute would likely not be getting any worse for now. The deal also meant that there were no additional tariffs put on Chinese goods in December of 2019 as negotiations were underway.
Putting this all together, it does seem that the economic backdrop is getting better in China. And that could benefit other economies around the world that trade with China, such as Japan or Germany. As we already discussed, it is likely that the coronavirus could lead to slower economic activity in the near term. However, looking at the SARS outbreak as an example, economic growth could recover quickly once the coronavirus is less of a concern.
What might this mean for stock markets?
Schuster: Although news around a virus can be a little scary, I try to think about this as a type of event that can lead to uncertainty for investors. Other examples of this include weather events, political news, or economic surprises around the world. Any of these situations can lead to market volatility for a few days, weeks, or even months. However, over time, I believe that stocks are driven by economic growth and rising corporate profits. That's what I've eventually seen in cases like this: As the situation settles down, investors tend to focus again on the fundamentals of the market. This can then lead to stock market recoveries.
In fact, this is what I saw during the SARS outbreak of 2003. Initially, there was some near-term volatility in stocks around the world, particularly in China. But as the virus was contained, and started to fade from the news, stocks in China started to recover in the second half of the year.
How are you managing investments through this event?
Schuster: At Strategic Advisers, I am part of an investment team that manages accounts for clients. We invest in stocks, bonds, and other asset classes for a wide range of investors. Most of our clients tend to have a financial goal that is at least 5 years out. So we aim to not overreact to near-term events. In this case, for reasons that I’ve already mentioned, we believe that it’s too early to react to the coronavirus. As a result, we have not made changes to how our client portfolios are allocated.
Yet at the same time, we are closely following developments on this event. We have access to deep research capabilities, both within and outside of Fidelity. This includes access to research analysts who are on the mainland in China. This allows us to have a timely understanding of this outbreak. If the potential impact of this virus leads to greater market volatility, or starts to impact the outlook for economic growth, we will adjust our client accounts accordingly. We will also look for opportunities to rebalance client accounts, which can allow us to keep a client’s account closely aligned to their long-term target mix of stocks, bonds, and other investments.
To wrap up, our investors can rest assured that the investment team at Strategic Advisers is laser-focused on managing our clients’ accounts in a manner that is consistent with their financial goals. We pride ourselves on being there for our investors through particularly trying times, like the one we are currently experiencing. We hope that we can provide our clients a little peace of mind by taking on the challenges of investing through volatile markets on their behalf.