The MSCI All Country World Index fell 1.6% – its largest decline since last August at the height of the US-China trade war – and reflecting the widespread concern among investors, the VIX index of market volatility jumped 20% to its highest level since October.
Markets in China and Hong Kong have been closed for an extended new year holiday. However, the yuan fell alongside exchange-traded funds linked to Chinese companies, while Japan's Nikkei and Korea's Kospi indices lost 0.5% and 3.1%, respectively, as investors sold shares in Asian companies exposed to China.
There was little escape for equity investors as stock markets fell internationally throughout the day, reflecting the spread of the virus with cases now reported in at least sixteen countries. The Dow Jones industrial average fell 1.6%, while the FTSE 100 and pan-European Stoxx 600 index were both down 2.3%. Among the hardest hit sectors have been those which rely on the Chinese market including airlines, hotel groups and luxury goods.
The coronavirus is a pneumonia-like infection that originated in Wuhan. So far it is more contagious but less severe than SARS, the 2003 virus which originated in China and required isolation and quarantine to control the epidemic.
Most analysts expect the outbreak to have a detrimental effect on China's first-quarter GDP figures, with the impact determined by how quickly the virus can be contained and then eradicated. It is likely that the stock market reaction reflects the underlying fragility of investor confidence amid persistent concerns over global economic growth. With many equity markets at record high levels and valuations increasingly stretched, the coronavirus outbreak may well be the catalyst for an inevitable de-risking.
Market reaction expected
As global investors, SKAGEN's funds have inevitably been impacted by investors' concerns and experienced declines in line with the broader market. Three of our equity funds currently own Chinese listed companies, albeit with relatively small aggregate exposure. SKAGEN Kon-Tiki has the largest with 20.1% of assets invested in China (significantly lower than the MSCI Emerging Market Index's 34.2% weighting), SKAGEN Focus has 4.4% and SKAGEN Vekst has 3.4%, while SKAGEN m2 is 4.4% invested in Hong Kong. The World Health Organization (WHO) has so far not declared the outbreak a global health emergency – something which could lead to trade and travel restrictions – and we would advise investors not to panic.
It is important to remember that investing always involves risk and periods of market volatility. While it would be unwise to underestimate the potential threat from coronavirus and the serious impact on those affected, the current market reaction is to be expected. Previous epidemics of similar diseases have tended to follow a pattern; there has typically been a market sell-off that continues until the number of new cases peaks, fears fall and equity markets then recover. In line with other periods of market stress, this has also created buying opportunities, particularly for long-term investors like SKAGEN. The economic impact of similar outbreaks, such as SARS, has often been similarly short-lived.
Unlike the SARS episode, Chinese authorities have reacted quickly and publicly to try and contain the coronavirus and a new hospital is expected to be built this week to treat those affected. The WHO is also better equipped these days to co-ordinate a global response and it is to be hoped that international travel restrictions can help contain the disease over the critical days ahead. We will continue to monitor the situation closely, both in terms of any direct impact on our holdings and opportunities the market reaction may provide.
N.B. All SKAGEN portfolio figures as at 31 December 2019, unless stated otherwise