Markets started off believing that the coronavirus outbreak would be brief and contained, and the ill-effects would be eased by central banks or governments.
Now, dealers and analysts are seeing a torrent of company reports laying bare the damage, either in terms of reduced demand in China and Asia, which has hit drinks giant Diageo, or disruption to supply chains that has hurt the likes of Microsoft.
Others have reported knock-on effects at home. For instance, KLM and Lufthansa airlines have frozen their hiring plans.
Dealers and analysts are seeing a torrent of company reports laying bare the damage that the coronavirus outbreak has done, either in terms of reduced demand in China and Asia
The longer the outbreak lasts, and the wider its geographic reach becomes, then the greater the risk of economic harm. That will come through disruption to supply chains, higher costs and decreased margins, as well as lower sales.
Retailers in the UK could grow more vulnerable, as could car makers and manufacturers of technology hardware.
Holiday and travel stocks are suffering as people are wary of venturing abroad, and the banks are fretting about bad loans.
The more profit downgrades we see, the more rattled that markets are likely to become.
Despite the big falls this week, stock markets have yet to price in what would be a worst-case scenario of a long-lasting global pandemic.
This could lead to a downturn in economic activity and stoke inflation as supply chains break down.
Shortages, increased transport costs and disruptions to the labour force due to sickness or quarantine could all drive prices higher. This would be bad news for shares and bonds after a ten-year bull run.
No one knows what is going to happen. Investors have to deal in probabilities and to look at what risks the market has already priced in, and what it has not.
Before the outbreak, markets were hot and greed was dominant. If the virus leads to a global economic downturn and inflation, then share prices are likely to fall further as fear takes over.
Equally, rapid containment of the virus could prompt a rally. The biggest fallers (travel, hotels, consumer discretionary stocks) might lead the way. Individual stocks could remain volatile as trading patterns settle, depending upon how long it takes for them to return to normal.
There are three things investors can do now to protect their portfolios from this uncertainty and potential future volatility.
First – and this is good advice at all times – ensure your portfolio is not too heavily concentrated on a handful of stocks, or one or two particular countries, industries or ideas.
There is a danger that investors put too much into areas where they think they are on to a winner and don’t allow for the possibility that they are wrong.
It is worth reviewing your portfolio for any holdings that go beyond your normal risk tolerance or don’t really fit with your long-term goals, target returns and time horizon. These sorts of punts are most likely to hurt you if things take a turn for the worst.
If you want additional ballast, gold may be an option, perhaps via a fund of precious metal miners, such as Blackrock Gold & General or the Vaneck Vectors Gold Miners ETF.
If there is a global slowdown, central banks might cut interest rates or print money via quantitative easing. Governments could look to spend more and build up bigger budget deficits. All three of those scenarios would traditionally have been seen as supportive for the gold price, which is advancing to seven-year highs at around $1,650 to $1,700 an ounce.
Second, make sure you have some downside protection by keeping a chunk of cash. This gives you a war chest so you can pick up bargains if you think stocks are good value. You could glean more protection by buying a fund or investment trust where the aim is not to lose money.
The Personal Assets Trust, managed by Troy’s Sebastian Lyon, looks to make sure investors don’t lose their capital. Its diversified portfolio includes high-quality equities such as Microsoft, Nestle and Unilever, short-dated government bonds, cash and gold.
Third – and perhaps this is most important – don’t panic and don’t start trading too much.
Shares are a long-term investment and have come back from scares over the past 30 years.
If you start dealing frantically, you will run up costs and there is a risk to being out of the market – if the outbreak is contained quickly, you could miss a rally.
No one knows what will happen, so take a deep breath and stay calm.
Russ Mould is investment director at broker AJ Bell
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