What is Coronavirus?

Coronaviruses are a large family of viruses, including some that cause the common cold to some that cause major diseases such as Severe Acute Respiratory Syndrome (SARS) and the Middle East Respiratory Syndrome (MERS).

The coronavirus outbreak came to light when on December 31, 2019, China informed the World Health Organization of a cluster of cases of pneumonia of an unknown cause in Wuhan City in Hubei province.

On January 9, 2020, WHO issued a statement saying Chinese researchers have made “preliminary determination” of the virus as a novel coronavirus.

The virus has been named “SARS-CoV-2” and the disease it causes has been named “coronavirus disease 2019” (abbreviated “COVID-19”).

Effect on Markets

Since this is not an economic problem, the effect on the markets will continue as long as the problem continues. If the problem intensifies, then the effect on the market intensifies.

While at this moment, we do not even have a proper cure for the disease, besides the virus is not like the previous ones of the type of Ebola, SARS, etc. where the infected person will show immediate symptoms. Contrary to earlier expectations, the virus does not look likely to disappear in the warm weather as countries like Hong Kong and Singapore also reported cases of casualty. South Korea has the most number of confirmed novel coronavirus infections — 1,766 (and 13 deaths) outside mainland China. Italy (528), Iran (245) and Japan (189) are the other countries with most cases.

The initial observations indicate that the disease will continue to spread at different speeds across continents and countries. The spread will result in slowing economic output and higher healthcare costs. The longer the spread time, the longer the efforts to reduce the future spread and therefore the longer the stress on the economy and the markets.

The markets will keenly watch the following:

1. The results of the containment efforts of the countries affected by the virus in the developed and the developing economies.
2. The progress on the vaccine trials.
3. The mortality rates.

The positive things are that

1. It does not look likely that the mortality rates are higher than 2% though the numerator and denominators may not be properly accurate.
2. In China, the number of fresh cases every day has started to decline.
3. It is already clear that the majority of people who have got the virus especially among the young have not got worse than a cough and a fever. The mortality rate is definitely higher in the case of older people and those with chronic health problems such as heart disease or diabetes
4. About a week ago Hong Kong and Singapore had the most cases, but these two countries appear to have largely contained the spread, with Singapore reporting 93 and Hong Kong with 92 cases as on February 27.

Our View

More than the effect of the disease it is the fear of the disease that will be affecting the global economy and therefore, the financial markets. In the fear of the disease, there will be shut down in factories, slower movement of raw materials and semi-finished goods, lower GDP output, higher healthcare expenditure and therefore more government fiscal support.

While in the near term of 6 months, we do not see an immediate recovery in the markets, but we will definitely see more clarity on both the emerging economic scenario and the necessary financial executions to be undertaken as per the situation. However, post the coronavirus threat, India is likely to see more inflows of foreign funds, some reasons that we find reasonable are as below:

1. Whenever the world gets familiar with both the virus and the cure for the virus, the world will look at alternatives to China. While the trade war was a precursor to the world looking for alternate sources, the current outbreak would accelerate the alternative countries.
2. Part of the correction that could have happened due to low growth and high valuation will get overlapped with the virus led correction and reduce the overvaluation.
3. Low-interest rates will continue as that is the only tool in the hands of the central bankers. Which means that the end of panic will see a quick reversal.

India has as of now, been able to restrict the spread after the initial reporting of 3 cases. This would be a crucial indicator as well and India could relatively outperform if it is able to restrict the spread. Any increase, on the contrary, could cause more than a linear effect on the financial market as well.

Asset Classes

Equity - We continue to increase investments towards the small caps and the mid-caps, and this is validated by the fact that the small caps and the mid-caps have corrected to a lower extent than the large caps as shown below:

The international equity exposure is mostly on the software side which is likely to do well compared to other industries.

Debt Funds - If the disease continues to affect people on a time scale of say 6-9 months, then NBFCs and longer maturity government bonds may see selling pressure or yields rising. However, our portfolio currently has exposure to mostly short-term papers.

Gold - it is likely that the commodity will do well if the asset classes correct and fear continues to remain large.

Liquid Funds - In the worst-case situation, any financial asset can be liquidated and therefore having a liquid fund allocation means that you can readily invest without liquidating any other asset class which may also be falling in value.

Financial Planning Point of View

It becomes necessary to hold 6 months of expenses as emergency funds in cash or liquid funds that are outside of the asset allocation requirement. It is necessary that money is not diverted to illiquid investments as that will have maximum uncertainty. Also, there could be NFO’s of closed-ended funds that will be marketed and one needs to be careful not to invest in those as it will reduce the availability of funds to take future action based on the various outcomes or the duration till the virus is contained.

The writer is the CIO of Mitraz Financial and can be contacted through micontact@mitraz.financial