Investing Through a Health Scare Like the Novel Coronavirus
There are many people comparing the current nCov to the SARS epidemic, with the financial aspect of the health scare in clear focus now that equity markets are pushing all-time highs in the US.
But nearly 20 years have passed between the SARS epidemic (in 2003) and the current beginning stages of the nCov (which isn’t classified as an international crisis — yet). But 17 years is a long time ago, and while hindsight is 6/6, the question that I have to answer is “How do I react now?”
Thus, instead of looking back, I will look forward and highlight the key changes (and lack thereof) that I am watching for guidance on how to invest my way through this newest scare.
Things that HAVE changed
1. The way we interact with each other has changed
With the advent of smartphones and social media, face-to-face interaction has decreased dramatically. Yes, there will still be the Lunar New Year visiting and interaction, but the necessity of doing so in a pinch has decreased.
In the past, there was really no other way to get around it. Even if you were sick, you had to go out to get food, you had to turn up for work before you were fully recovered, etc. You had to meet more people.
Nowadays, the social norm has shifted. We interact with each other more online, and there is a decreased emphasis on “hanging out”. This is not to say that some face-to-face time is not important, but relative to the past, we connect and interact with each other very differently now.
2. The way we interact with businesses has changed
With the proliferation of e-commerce and services-on-demand (Uber,Grabfood and the Wechat / Gojek super-app), there is less of a need to even get out of the house.
Heck, even working from home / remote working is catching on.
This is a far cry from the past, when people still needed to get out of the house to sustain themselves. Now? Even groceries can be delivered to your door.
Even if a quarantine is imposed in the future, it is unlikely that services as a whole will take a hit. Yes, certain sectors (airlines, hotels) would be more badly affected, but the slack will be taken up by all the other companies providing services-on-demand.
3. The way we interact with the markets has changed
Back in the day, it was difficult to own a diversified basket of shares on your own, much less invest small amounts in foreign markets.
But now? With the advent of ETFs and robo-advisors, it has never been easier to just be “in the market”, with any amount of spare cash you may have lying around. However, since the ETFs are generally structured as a basket of securities, any investment into this basket will prop up the market (generally), thereby limiting the impact of both up and down moves.
Things that HAVEN’T changed
But, there are some things that the nCov doesn’t change.
1. The technology mega-trend has not changed
In the past few years, people have been saying that the growth stocks have trounced value stocks, and that it’s time for value to shine again.
However, there is one big component that is missing from that analysis — that the current mega-trend of technology has not ended yet.
One reason why growth stocks have outperformed so strongly is that many of the growth stocks are tech stocks, and the tech revolution is still happening. This nCov will not change that. The S&P 500 is still being led by the FAANGs / XLK, and technology is still leading the way in the many current and future innovations.
This technology mega-trend is still alive and well.
2. The accommodative stance of the Fed has not changed
The Fed has shown its willingness to do “QE but not QE” and position itself to support the market. This nCov will not change that.
In fact, should be markets wobble significantly because of this, we would be able to see if the Fed steps in to stabilise the markets. That would be a more explicit test for us to confirm that the Fed will indeed underwrite the market… for now.
However, there is still one wildcard — Consumers.
Consumers have been carrying the market for the past year or so. Many research pundits credit the consumer for being resilient through this period, and that helped the markets to rebound and grind higher.
But, the nCov can impact consumer sentiment. If the consumer did indeed carry the day, then this recovery will be at risk of stalling if the nCov causes the consumer sentiment to change. This could then be the catalyst that sparks a correction which could potentially lead to a recession.
Given all this, how should I react?
Now comes the million-dollar question — how should I react to this?
Well, based on my personal conclusions, I will continue to watch for opportunities to increase my stake in the US markets, via the robo-advisor I use. This is because I do not see the nCov disrupting the key trends I view as important for the markets to continue to do decently, namely the technology mega-trend and the accommodative Fed.
Of course, I may be wrong, and the catalyst of a weaker consumer causes the whole house of cards to come crashing down. Well, there are two things which I take comfort in if my initial thesis is wrong:
- I am able to sleep at night if my holdings take a hit. This is the litmus test for whether your investment portfolio is too risky for your risk appetite; and
- I am working on a downside hedge. This will still take a while to fully form, but once it is in place, I would be well-placed to weather the vagaries and the storms of the markets.
I have learned that it is easy to be caught in ‘analysis paralysis’, whereby I do not take any action based on my personal analysis of the market. To counter this, I have already put in place my own action plan and I personally think that this nCov will not derail my plans too much. So, how am I going to invest through this? Well, by sticking to my plan, watching for opportunities to accelerate my cash infusion into the markets, and by continuing to flesh out my downside hedge.
Since is this posted on the eve of the Chinese New Year, stay safe, healthy, have a Happy Chinese New Year and may this new year be prosperous for all!
