How to invest amid corona outbreak?

Coronavirus or 2019-nCoV has added yet another seemingly malignant element to investor’s investment management dilemma.

Unlike previous outbreaks (Bird Flu, Swine Flu, MERS, SARS, Ebola etc.), this one seems to have grave implications not just in the ferocity with which it has spread but other factors like persistence in the environment, healthcare workers affected, entire cities under quarantine and rapid global spread.

It appears that the human, economic and financial outcomes aren’t clear either.

The government disclosed facts reveal a few thousand deaths and just under a hundred thousand infected worldwide. Travel to and from China has been severely impacted (not to mention in-country travel within the Chinese territory) and neighbours like Hong Kong, Singapore, and others are bracing for ‘peak-virus’.

With the lunar new year holidays being extended, now factory closures are likely getting extended.

To understand the implications for the rest of the world and, India, these factory closures are key and have a tri-directional impact: finished goods supplies, raw material demand and the demand for finished goods.

Extended factory closures will impact supplies directly. Apple Inc. has already stated that iPhone sales will be slower, they have reduced or completely closed stores across China and, if the pandemic grows, may look at similar outcomes in other geographies.

Starbucks and other in-store dining have implemented similar measures while Airlines have virtually stopped China’s services.

With such measures, raw material supplies and Oil demand is continuously slowing (Brent April 20 Futures plunged to a low of $53/$54 from near $70 levels towards the end of last year) while companies scrambled to shift production outside of China and rejig supply chains to ensure raw material supplies, along with moving stocks to ensure supplies at stores.

Factory closures and other related disruptions also have a severe impact on the demand side across the globe: travel and tourism outbound from China have been in the region of 138 million border crossings spending a staggering $290 billion a year (with McKinsey predicting a growth rate of 5.4% in their report Chinese tourists: Dispelling the myths September 2018).

What if this continues?

As investors, the primary goal of an investment exercise is to judge and manage risk; with the primary outcome being expected returns. With the uncertainty of this sort, we are looking at a sharp rise in volatility across financial markets (even with interest rates continuing their downward march - notable exception being India where inflation has put paid to central bankers planning).

Further, in India, government measures to kick-start economic growth may take time and inflation may also continue to be higher driven by both supply-side constraints as well as liquidity.

The objective, therefore, becomes, at the risk of sounding clichéd, to diversify the portfolio -- add weakly correlated asset classes.

Directional movements may in themselves make a stock-picking (or a bond picking) exercise less than efficient and therefore it may be more prudent to invest in broader markets via lower-cost products like Exchange-traded Funds (ETFs) or, if there is no access to trading accounts, then Index Funds.

Last but not the least, SEBI has formulated new regulations for both Portfolio Managers as well as Investment Advisers while simultaneously cracking down on rogue distributors.

This may succeed in making the above diversification exercise more effective or viable if it is conducted in partnership with a manager or an advisor.