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Spread of coronavirus dictating equity market movements

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Aidan FarrellDirector of Global Small Cap Equity, Eaton Vance Advisers International Ltd.

      Dublin - News that the coronavirus has spread to Europe — especially Italy — and elsewhere in the world has raised investor anxiety. The near-term threat to the global economy and therefore equity markets, irrespective of company size, appears to be rising.

      Until today, equity markets had reacted in a relatively sanguine manner to coronavirus concerns, viewing the outbreak as a short-term deferral of economic growth rather than a more fundamental derailing of the global economy. Now the rate at which the virus spreads will likely dictate market movements in the days ahead, with equity investors clinging to every statistic coming through the newswires.

      Feeling the impact on companies, sectors and supply chains

      We already feel the impact of the coronavirus on companies. A real example for me was my own decision not to travel to Japan this week, to a conference that was subsequently cancelled. Think about the repercussions of just one conference cancellation on flight tickets, hotel rooms and catering. How many thousands of others are making similar decisions around the world right now? If we consider tourism and the associated demand for luxury goods, the blow to the travel and leisure sector becomes clear.

      Of equal importance is the impact on supply chains as workers are told to work from home to limit domestic contagion. Demand in some parts of the economy may remain relatively unscathed. But when products and services cannot be supplied on time or in the required quantities, there could be clear economic costs.

      Managing equity portfolios through uncertainty

      How should a portfolio manager react to these events — if at all? I say that not with complacency but deliberately, with eyes wide open, because inaction can sometimes be one of the better forms of active management. On the small-cap team, we're committed to investing in what we consider to be high quality companies, well positioned in their respective industries, with good multi-year prospects.

      Most important when we're facing increasing levels of uncertainty, these companies have strong balance sheets that can help them to withstand — and sometimes even take advantage of — periods of economic weakness or volatility. Last week, one of our non-US holdings actually upgraded their forecasts for the year, in part because of the coronavirus. Unsurprisingly, this company is in the healthcare sector!

      Leaning in to risk in the short term

      We think about the long-term franchise value of the companies that interest us, looking beyond the near-term earnings concerns and focusing on what can be achieved in the years ahead. That means asking ourselves, what do we need to believe — in terms of revenue, earnings and cash flow estimates — for this to be an interesting time to invest in a new position or add to an existing one?

      As share prices start to tumble in reaction to genuine concerns in the near term, what we need to believe in the longer term may actually be relatively undemanding in the short term. While it may feel uncomfortable, we've found that can often be precisely the time to lean in to the risk.

      Bottom line: In our experience, holding good quality companies, staying well diversified and taking minimal regional and sector risk has helped to limit our exposure to potential risks like the coronavirus outbreak, which could force us to take quick counter measures. While the news flow is concerning and stock prices are starting to react to the uncertainty, we believe it's important not to be distracted by this challenging time for investment markets.