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Coronavirus, investing and why it’s important to focus on the long term

In recent weeks, Covid-19 (the coronavirus) has made headlines around the world. By the end of February 2020, more than 81,000 people had been diagnosed with the illness in 37 countries from China to Switzerland.

While governments and the World Health Organization take steps to halt the spread of the virus, the impact of the outbreak is being felt in a range of ways, including on world stock markets.

By the end of February, the FTSE 100 index had fallen to its lowest point since July 2016. Other markets, including the Dow Jones and the Dax also reported falls.

While the short-term effects of the outbreak may be keenly felt, the recent stock market falls are an excellent illustration of the nature of volatility when investing, and why it’s important to focus on your long-term goals.

Why is coronavirus affecting stock markets?

There are several reasons why the virus outbreak is having an impact on business.

Firstly, many companies have been forced to close factories or slow production, either because they are in an affected area or because of issues with staff ‘self-isolating’.

The Italian manufacturer MTA, which makes electrical parts for cars, has been forced to close its factory in Codogno after the Covid-19 outbreak in northern Italy. It said the closure would have a knock-on effect on production at Fiat Chrysler’s plants in the country before spreading to other carmakers across Europe.

Travel companies have been particularly hard hit, as people across the world cancel or postpone travel plans. German airline Lufthansa has halted recruitment and is offering employees unpaid leave as part of cost-saving measures to limit the financial impact of the spread of the coronavirus.

And, the closure of many bars and restaurants in both China and other affected areas has also hit many businesses. Events in China, Italy, South Korea, Japan and Thailand have been postponed or cancelled and a drop in tourism has also had an impact on consumption in bars and restaurants.

Diageo, the UK-based drinks giant, has reported that Covid-19 could hit its profits by up to £200 million as restaurants and bars in China remain closed, and sales in airports slump.

Of course, all these issues affect sales and profitability which, in turn, have a downward effect on share prices.

As the Financial Times noted, the sell-off ‘has developed into one of the most significant retreats since the 2008-09 financial crisis’, with investors responding to the global spread of Covid-19 by heading for safe havens such as gold and gilts.

The history of pandemics and stock market performance

Back at the end of January, Charles Schwab produced a report which examined the performance of world stock markets in the aftermath of previous pandemics including SARS, Swine Flu and Ebola.

Their conclusion was simple:

“While there is always the chance that the next outbreak could have greater consequences, the global economy and markets have been relatively immune to the effects of past viral epidemics – even when the global economy was especially vulnerable to a shock. A short-term dip in stocks tended to be followed by the continuation of the upward trend.

“Individuals travelling to Asia may be wise to take some precautions against contracting the coronavirus, but investors may have little need to take action if their portfolios are diversified and aligned with their long-term plan.”

Why it’s important to take a long-term view

In many ways, the coronavirus outbreak is just the latest in a long line of unexpected events which has impacted global stock markets.

Even in recent years, there are plenty more examples, from the outcome of the EU referendum to the election of Boris Johnson. Everything from the latest inflation figures to the tweets of Donald Trump can have an impact on confidence, business and markets.

The EU referendum is an excellent case in point.

As investors arrived at their desks the morning after the referendum, the FTSE 100 and FTSE 250 fell around 9% and 12% respectively before rallying later in the day.

Here’s how stock markets performed overall from the day of the referendum until 10 June 2019.

Anyone who had panicked and exited the UK market in the immediate aftermath of the referendum result would have lost more than 25% in returns over the next three years.

Unexpected events in the global economy, or the international health arena, can have a short-term impact on markets. So, it’s important not to panic, to focus on your long-term goals, and to be patient. As we have seen time and time again, markets tend to recover in the long run.

Get in touch

If you have any questions about your investments in the light of the Covid-19 outbreak, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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