Paul's Insights: Coronavirus - Responding to a black swan
In the world of investing, a 'black swan' is an unpredictable event with the potential for serious consequences. Right now, some commentators are saying the outbreak of coronavirus in China is a black swan.
Without doubt, the spread of coronavirus has been astounding.
First identified in December 2019, the number of cases has risen to over 20,000 as I write in early February. Very sadly, hundreds of people have succumbed to the virus.
While comparisons have been made with the SARS outbreak of 2003, the impact of coronavirus is quite different. It has spread more rapidly, though thankfully, with fewer fatalities.
In our highly interconnected global economy, investors don’t have to hold overseas assets to feel the financial impact of coronavirus.
China is by far Australia’s biggest trading partner, accounting for one-quarter of our global trade. China also buys close to 25% of our coal exports, and is our number one source of tourists. In addition, 150,000 of Australia’s 400,000 overseas students hail from China.
So it’s not hard to see how the outbreak of coronavirus can impact Australia’s economy as well as listed companies across a variety of industries.
Despite some jitters, the Aussie sharemarket has held relatively steady since the start of 2020. That said, many investors may be uncertain about how they should respond.
My first thoughts are to take care of your health. That means following government health directives and adopting sensible precautions if you’re travelling.
In terms of your investment portfolio, I’m not convinced that you need to take any steps at all – provided your investments are framed with your long term needs, personal goals and tolerance for risk in mind.
Let me stress, I am not discounting the tragic loss of life – nor the suffering of those who have contracted the virus. And I certainly don’t have a crystal ball that shows just how far coronavirus may spread.
What I do know is that mankind has faced unprecedented health crises in the past – everything from SARS, MERS, swine flu, and Ebola. For the victims and their families, the human toll has been dreadful.
But for economies and sharemarkets, the recovery process has often been swift once the outbreak has been contained.
The upshot is that a black swan shouldn’t derail your long term investment plans – as long as you have ticked all the boxes for low cost investments that you’re comfortable with, and which have the potential to help you achieve personal goals.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.