Stock markets around the world have plunged earlier this week as the coronavirus spreads. Over the weekend, large parts of Italy's industrial heartland were placed in quarantine and the oil price has slumped by 20%. The FTSE 100 has fallen by 6% on Monday morning. The virus has now infected people in over 50 countries and appears to be becoming established in several places. There have been successes in constraining its spread, however. A few weeks ago, new cases in China were measured in thousands each day. Now they are measured in the tens (44 to be precise). It would appear to be over optimistic to hope that the disease can be eliminated, and when outbreaks occur, the spread can be very rapid. This is increasingly looking like something that we must learn to live with.

We have been a lucky generation. Our forefathers had to handle a host of epidemics such as smallpox, diphtheria, and cholera. Society continued then as it will do today. Covid-19 is nasty, but compared to the severity of some other diseases it might be considered mild. This appears to be an illness that for many will be slight and it seems that for infants it may be scarcely noticeable.
Action will be taken to slow the spread of the disease, not to contain it but to allow health services a chance to care for those afflicted. People are likely to change their lifestyles. Sound economies are flexible and robust but there will be disruption in the short term. Businesses will be affected but the majority of the cost will fall on the public sector. Those most vulnerable to the disease are elderly or in ill health. Caring for the ill will be a cost to society and politicians will need to assess how this is to be apportioned. Our guess that it will be pushed out to the future by borrowing.

There is a growing likelihood that a recession will result in some economies. The FTSE 100 has now fallen 20% so far this year and is at a level first seen over 20 years ago. It is important to point out that interest rate expectations have fallen to the floor as well. The importance of the latter should not be ignored. Over the last few years we have seen the powerful effect that falls in interest rates have had on prices of shares and other assets. Interest rates are now essentially being discounted at 0% for the next decade and probably beyond. In contrast, the dividend yield on the FTSE 100 now exceeds 5.5%. We acknowledge that some dividends may be cut but many will not and this yield spread seems very attractive on an historical perspective.

Markets hit by a sudden shock can swiftly turn panicky. Short term speculators and those aggressively positioned hurry to dump holdings whatever the price. Those with long time horizons can take a more measured approach.

As at 9th March 2020.