The Year of the Rat is starting off with a round of volatility, precipitated by the Wuhan pneumonia outbreak.

Mark Twain once said, “History  never repeats itself, but it does often rhyme.”

The previous episodes with SARS and MERS provides useful references and basis for comparison against the recent outbreak.

Background on the Wuhan Virus

• The Wuhan virus is a coronavirus, from the same family of viruses as Severe Acute Respiratory Syndrome (SARS) and Middle Eastern Respiratory Syndrome (MERS)
• These viruses originate from animals (most likely bats) and found their way into humans via another animal host, Civet cats for SARS and camels for MERS
• The host for the Wuhan virus is yet to be determined, though snakes have been mentioned as a possibility

How lethal is this virus?

• As a comparison:
  • Influenza kills 400,000 a year, less than 1% mortality
  • SARS had about 10% death rate (about 800 deaths from >8000 infections)
  • MERS had a 35% death rate
• Based on the figures available now, the Wuhan virus looks less lethal than SARS and MERS (in the 1-2% range):
  • Though these could change through mutation or if the fatalities increased from those already been infected
• The initial fatalities from the Wuhan virus were mostly seniors over 60-year-old and had other pre-conditions
• The breakdown of these figures shows the fatality rate is much higher with the elderly in all 3 episodes:
  • e.g. in the case of SARS the fatality for age <24 is 1%, 15% for age 45 to 64, and 50%  for age 65 and older
• Though less lethal, the human to human infection transmission rate for Wuhan virus seems much higher than SARS and MERS

These virus pandemics creates ‘panic reactions’ because:

• They are much more lethal than the common flu viruses
• Human to human transmission causes the virus to spread rapidly
• Antibiotics and the anti-viral are not effective and vaccines are not yet available
• The extraordinary measures taken to contain the virus creates a sense of impending doom

What can we learn from the SARS/MERS episodes?

• These pandemics through careful management is containable
• Looking beyond the tragic loss of lives, the economic impact of past events is mostly fleeting and not disastrous
• Still, the ‘panic’ will have an economic impact (more so for some industries and countries than others)
• And then have an even a bigger impact on the stock markets as markets are prone to over-reaction

What does this mean for your portfolio?

• Stock prices have already sold off and will likely see more selling pressure
• But to put things into perspective:
  • Not all assets classes in the portfolio are affected equally badly:
    • Gold prices have climbed
    • Bond prices have benefited from lower yields
    • Life settlement investments should be immune from equity price volatility
    • Hedge funds – whilst most strategies may have some correlation to the markets, historically as a group, the volatility on the downside should be more measured
    • Cash on hand gives us the ammunition to buy into equities that will become oversold
  • For equities, some positive impact on certain business areas:
    • With the outbreak, Chinese consumers are likely to stay indoors benefiting online games, eCommerce, digital payments
    • Even those with negative impact, the negative impact may be a passing phenomenon

28 Jan 2020