Quality in times of uncertainty

It is a time of great uncertainty and concern for investors in global markets because of the COVID-19 outbreak and the possibility that governments in Europe (at time of writing), the US and elsewhere will have to take similarly extreme measures as China has (apparently successfully, again at time of writing).

The outbreak is a serious issue and its impact is at this stage difficult to assess. COVID-19 will spread (China currently accounts for 94% of current reported cases whereas it ended up having only 66% SARS cases).  Countries including the UK may have to close schools and self-quarantine people, which will have a dramatic impact on business and social activity, sentiment and markets.

However, it is important to recognize a number of things:  COVID-19 is a flu with an elevated mortality rate among elderly populations, in particular those with pre-existing conditions.  It is not the plague, ebola or a similar disease with high mortality.  The rate of new infections in China has slowed significantly, indicating that the measures taken are having an effect and that containment works.  The flu is a seasonal disease and typically starts in November, peaks in February and decreases in March, so it will become less prevalent with the summer season in the Northern hemisphere.  Finally, universities, research institutions and pharmaceutical companies are working together in unprecedented ways and a vaccine is likely to be found in due course.  

So the effects are likely to be temporary and there will be opportunities to take advantage of market overreaction.    There is a risk of a global credit led economic collapse but it is only one of a number of possible outcomes and governments and central banks are highly aware.  Even if such a collapse were to take place, it would be more challenging but our companies will get through it and it will be an opportunity.  

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