Investors are looking beyond the Covid-19 outbreak

MARKETS seem eerily calm, even as China continues to report thousands of new confirmed cases of coronavirus infections, or Covid-19, every day. The disease has spread to more than 20 countries globally, with new confirmed cases continuing to be reported daily.

This is quite a different market reaction compared to when Sars or the Severe Acute Respiratory Syndrome hit the region and the world some 17 years ago.

Markets, and people in general, were much more fear-stricken then. That was probably due to the many unknowns related to the new disease, and its seemingly high fatality rate.

People had no idea whether it could be contained, and how long it would last, and how it would affect consumer behaviour and businesses in the long term. Within one month after China first reported the new disease to the World Health Organisation (WHO) on Feb 10, 2003, the Straits Times Index had fallen by more than 6 per cent.

In comparison, it's been more than one and a half months since Covid-19 was reported to WHO on Dec 31, 2019. The biggest market reaction was in the last week of January and the first trading day of February. Since then, prices have recovered remarkably well, helped in no small part by the timely agreement signed between China and the US to cool trade tensions between the two countries even further.

As of yesterday, the STI is little changed from the end of last year.

Given that Sars wasn't that long ago, and most people still had memories of it, and having witnessed how the world overcame the infection and how markets have recovered since, the markets and people in general have made certain assumptions about the current outbreak.

The first case of Sars in Singapore was in March 2003. It took five months, until July that year, for the disease to be eradicated here. Within six months after the new disease was reported to WHO, the STI has returned 22.6 per cent with dividends included. Within one year, its total return came to 47 per cent and within three years, investors were rewarded with a total return of 88 per cent.

Based on the experience of Sars, the markets seem to think that:

Are these assumptions well-grounded?

We are still at the early days of the new outbreak, and the situation will be very fluid. The few things we know about Covid-19 vis-à-vis Sars are that it is more infectious, but less deadly. It may evolve into just another variety of seasonal flu that affects us every now and then.

What we also know now is that there is concerted effort to reduce the spread of the disease, and there is heightened alertness amongst the general population. Meanwhile, many health experts and pharmaceutical companies are racing to develop a vaccine against the virus. The technology and ingenuity of humans have overcome a number of difficulties before.

But, until the disease is brought under control, the various measures put in place by governments and on a voluntary basis by individuals will hurt economic activities much more than Sars did. China is a much bigger part of global economy today than 17 years ago. It has become the epicentre of global supply chains for many products, and its tourists contribute a significant part to the GDP of many countries in the world.

Equities are long-duration assets

Yes, equities are long-duration assets, that is, they are valued based on the assumption that they will generate perpetual streams of income. A quarter or two of negative or lower earnings shouldn't have that huge an impact on the value of companies. Even if the economy is going to be horrible for the next five years and dividends are going to be cut by 50 per cent, the present value of the stock theoretically should only be reduced by 5 per cent! A 10-year slump would only wipe out 10 per cent of the stock's value.

The key is whether there will be a permanent reduction in demand. It will be if the virus wipes out a large number of people from the face of this earth. Based on what we can tell as of now, this is unlikely to be the case. Of course, the virus can mutate. But some expert opinions have it that virus has self-preservation instincts as well. It wants to propagate and survive, and it can't do that if it kills all its hosts.

In the weeks and months ahead, developments may take a turn for the worse, and markets may decide it has under-reacted to this outbreak. We may then see some violent movements in the markets, especially given the high valuations in the US.

But five, ten years out, there is a high probability that this will be another blip in the long running uptrend in the markets.

Ben Inker, asset management firm GMO's director of asset allocation, said: "The true value of the stock market changes very slowly and smoothly. It is the myopia of investors that causes market prices to vary so wildly."

Have investors gotten more long-term in their approach? I guess the answer is as cliché as it can be: Only time will tell.