Precautions and not virus is the risk


    During these days with heavy selloffs in the stock markets around the world, there is no doubt that investors are considering what Covid-19 will cost for individual companies or which negative effect the spreading virus will have on the stock markets in general. If someone in this regard has made a reasonable calculation showing that leading stock indices should nosedive 12 to 15 percent within one-and-a-half weeks as a consequence of Covid-19, then I am very interested to see the calculation.

    In the absence of data, then an option is to always use one’s intuition. The obvious choice for many investors is that if they must respond to the spread of the virus, then selling is the most natural path to follow. In some cases, it makes perfectly good sense, namely where the effects of Covid-19 will cost certain companies and sectors earnings this quarter, and who knows, maybe even further ahead.

    In the risk zone, one finds the airlines, hotel chains, as well as the restaurant and entertainment segment, but should the virus spread further, then the transportation industry could be squeezed. Several companies have already announced that they expect lower earnings in the current quarter, and most companies even estimate the lost terrain.

    It gives investors the possibility to estimate how much the individual companies should be traded down in price. However, this is still only information at a single company level that again can be used to estimate the negative impacts within some sectors. Though on the other hand, it does not give a rational reason for sending the stock markets 15 percent lower.

    I surely recognize that for investors, it remains unknown whether the global spread of the virus attack has just really begun, with possible unlimited negative economic effects.

    Despite the new cases around the world, it must be remembered that throughout Latin America, only one potential case out of a population of 642 million people has been registered so far.

    The statistical data coming from China about the development of Covid-19, which is also recognized by the WHO, indicates that the outbreak has peaked in China. Furthermore, it is my expectation that a growing part of China is on its way back to a more normal level of activity.

    My fear of unknown financial consequences is much more rooted in overreactions from precautions taken, without it being particularly rationally founded. An example is that there is now a “State of Emergency” in the San Francisco Bay Area with 7 million residents, without a single Covid-19 case detected. This move has no drastic consequences during the first round, but conversely, accelerating such actions could really have a negative impact on the economy.

    Therefore, my attention now increases just as much in the direction of “precautions”, as in new virus cases. It is still unknown whether it is too early to look at the post Covid-19 epidemic period or when the world breathes a sigh of relief again, but it is possible that investors should already consider if some securities moved too much.

    I am convinced that global inflation will dive for a period, which could be positive for the stock markets. Otherwise, if the characteristic of the virus is that it often affects victims who are weak before the infection, then this could also be the case at macroeconomic level.

    Further, it is my assessment that the global economy is still showing robustness right now and I believe that private consumption is an important source of growth. One of the most recently published figures on consumer confidence from France indicates that in France, the concern has not yet spread to private households. The index even reached 104 against expected 103 for the month of February, which was a positive surprise. I consider the coming data on consumer confidence from around the world as an extraordinarily important thing in the upcoming months, as good numbers will counterbalance the negative economic consequences of the Covid-19 outbreak. A robust private consumption will also be a good insurance against large declines in the stock market. If the virus spreads further, it might harm the global consumption, though it is the precautions that I regard as a bigger threat to economic activity. If growth is in danger, then it pays off for investors to watch out for signals on more public spending to counterweight too heavy negative economic impacts – here, countries with fiscal manoeuvre room will outperform the weak countries.