Economic impact
The Chinese economy is already under strain. Industry, the production of goods for sale or export, makes up 41% of GDP, and if factory workers required to convert raw materials are unable to travel, this will inevitably slow.
Services, at 52% of GDP, covers entertainment, retail and tourism. Global corporations are banning employees from visiting China for the foreseeable future and many major airlines have cancelled all flights. Tourism alone accounts for around 10% of economic growth – around 140 million trips are made by foreigners, and 134 million trips by Chinese tourists every year. We can assume most of this is wiped off GDP for 2020. The question is not will coronavirus impact Chinese growth, but how long the impact lasts.
Ten years ago, Chinese GDP was worth $6 trillion, now it is worth $14 trillion, and makes up around 16% of the global economy. A slowdown in China will impact the global economy. The National Institute of Economic and Social Research forecasts GDP growth of 5.9% for China this year, resulting in global growth of 3.1%. It is easy to imagine both these figures being knocked off course by current events, particularly if coronavirus does take on pandemic status.
What should investors do?
While there is no doubt coronavirus is and will continue to impact markets, that does not necessarily mean long term investors should be overly concerned. Timing the market is notoriously difficult; even professional investors get it wrong. Trading on news events can often lead to bad outcomes – panic selling often locks in losses, and jumping back into the market is hard to do. Behavioural finance shows us that selling at the top and buying at the bottom goes against our herd instincts, but that is exactly what you should do to gain the greatest returns.
If you are investing into an ISA or pension, with a 10-plus year view, the best course of action is to do nothing, and stick with it. Within four years both the FTSE 100 and the S&P 500 had shrugged off the losses of the global financial crisis.
That said, now is as good a time as ever to look under the bonnet of your investments and assess whether you have a properly balanced portfolio, and if the risk in your portfolio matches your appetite and goals. This is particularly important if your goals are shorter-term, or you are approaching or in retirement when you have greater sensitivity to a market downturn.
Coronavirus aside, a well-balanced portfolio should have exposure to safe haven assets such as gold, and lower-risk assets such as bonds. Funds focused on capital preservation, strategic bond funds, and multi-asset funds with a cautious approach are good additions if you are looking to add diversification to an equity portfolio. And remember to always make the most of your tax shelters.
