The latest developments around the spread of the Coronavirus have revealed how fragile a globalized economy still is when it comes to government interference. First and foremost, we do not believe that the Coronavirus is going to be more of a threat to the world than any other newly discovered virus with general flu symptoms in the past. One has to keep in mind that, based on WHO figures, the common flu kills approximately 650,000 people around the globe every year even though it is vastly considered a contained disease with well developed and working vaccines that prevent large numbers of the population from even getting infected. Hence, it is a matter of time until similar measures against the Coronavirus will tackle the problem and future outbreaks will be managed a lot more effectively.
The major problems at this point in time are the media and government interference as far as free trade, travel, and commerce are concerned. All the latest media coverage about the Coronavirus by endlessly repeating the same old story has led to, is unfounded panic among the general public. As a consequence, it has been triggering irrational consumer behavior that is likely to result in stagnating or even declining economic activity, especially in a mainly consumption driven economy like in the United States. If the news channels covered every American who died of the flu, the media would be busy 24/7 since about 30,000 - 60,000 U.S. citizens die of the "common" flu every year. And guess what? Nobody declares a "state of emergency", nobody would even think of quarantining the hundreds of thousands of citizens who get infected nor has anyone ever shut down whole towns and regions within a country like the Chinese and most recently the Italians have. And why? Because it makes no sense. Such measures are clearly disproportionate to the problem and will not solve the virus issue in any way, shape, or form. The virus has been spreading and will be spreading no matter what because that's what viruses like previous flus and the Coronavirus do. It has already traveled all across the globe and it is impossible to be contained by the measures taken by governments around the world. The real issue - and not the solution - is big government that feels pressured to "take action" in order to "satisfy" their voters. Sad but true. As Reagan put it, "the best minds are not in government. If any were, business would steal them away.". Of course, they will be failing across the board since most governments typically are highly incompetent and the measures and restrictions taken by ignorant politicians will become the roots of the problem. By interfering with business and free mobility for goods and consumers in order to "protect" the people's health, GDP growth will actually suffer and slow down substantially, if not reverse with the potential of a recessionary outlook while the virus will continue to spread anyway. What's left will be artificially manufactured damage to economic growth for no reason. Unfortunately, this is exactly what the world economy is headed towards right now.
Additionally, the current "crisis" is being taken advantage of by governments hostile to the United States such as Russia and some countries in the Middle East that are e.g. flooding markets with cheap oil which could have a significant impact on U.S. oil companies in the shale and fracking business. If the trend continues, we will see a lot of those companies go out of business which again will have a negative impact on the U.S. banking system as a lot of them have significant debt that they won't be able to service anymore.
Last but not least, should the U.S. economy drift into a standstill with a recessionary threat, it most likely will affect up-coming U.S. elections and drive even more voters into the arms of candidates who are promising more "welfare" and "government regulation" which would even prolong a potential economic recovery. Needless to say, a U.S. presidency with socialist tendencies would rattle the stock markets even further.
The good news is that investments in Swiss francs, gold, and alternative investments have been performing well, against the trend and have softened the blow for any portfolio with such exposure. As always in a time of crisis, international diversification is key. Furthermore, the markets are overall at still relatively high levels compared to the last 4 years and the Coronavirus at the end of the day may just have been the trigger for a healthy stock market correction that had been overdue. As always, time will tell. Equities could easily lose another 10% - 20% and volatility will remain high for a while. However, we believe that there is a lot of upside for the mid- to long-term investor at the moment and that the stock market decline is exaggerated. Historically, corrections like this represent excellent purchase opportunities and are likely to pay off over the next 3 - 5 years (the only time when it took a much longer was back in 2008 - however, the environment at the time was significantly worse from today). Or as Baron Rothschild back in the 18th century put it, "the time to buy is when there's blood in the streets."
Our advice is to keep on buying increments of good quality blue chip stocks with solid dividend yields over the next few days and weeks. Yes, it will likely get worse before it gets better but a lot is already priced-in as the stock market always works as a leading economic indicator and the world will get back to normal sooner or later.
Please do not hesitate to contact us if you have any questions or concerns.
Oliver E. Hohermuth, Principal & Chief Investment Officer