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How to Immunize Your Investment Portfolio Against Coronavirus

Kieran Smith
March 20, 2020

A butterfly flapping its wings in Brazil can cause a tornado on the plains of West Texas, says the butterfly effect. And in today’s global economy, a man eating a bat in China can end up eroding the retirement savings of millions of people around the world.

A butterfly flapping its wings in Brazil can cause a tornado on the plains of West Texas, says the butterfly effect. And in today’s global economy, a man eating a bat in China can end up eroding the retirement savings of millions of people around the world.

To control the unpredictable ‘black swan’ of coronavirus, politicians are quarantining citizens to buy time for strained healthcare systems. But these containment measures threaten to bring a heavy economic toll. 

With entire regions in lockdown, the factories that lie at the source of global supply chains have fallen quiet, millions of workers are telecommuting rather than going into the office, likely causing productivity to drop. And, thousands of flights, cruises, conferences, and events are being cancelled around the world. 

From tiny mom-and-pop stores to the Silicon Valley giants of Apple and Microsoft, businesses everywhere are registering an impact, and the shock has sent markets plummeting—leading everyday investors to feel the pinch.

So how can you immunize your portfolio against the coronavirus?

The sickening global economy

The first step is understanding what the economic impact of this new virus will be. Unfortunately, even experts in the matter disagree.

Some suggest it will only cause slight supply chain disruption, and others claim it could be the pin that pops the credit bubble of quantitative easing and triggers a drawn-out recession.

When Spanish Flu ripped around the world one hundred years ago, at least 50 million people died. And the Dow Jones Industrial Average fell about 30%. But World War I was raging at the time and the exact economic impact of the virus is difficult to quantify.

Today’s interconnected world offers more possibilities. The coronavirus can board aeroplanes and cross countries in mere days. But at the same time, improvements in medical technology have fortified our defences. 

But whatever the impact, global markets are already pricing in a significant economic slowdown.

An economic injection

As the virus sweeps around the globe, U.S. stock indices have set record declines. The Dow plunged more than 2,000 points in the biggest drop since 2008, and the S&P 500 has set some of the biggest “gap-downs” at the open since 1982.

In bid to prevent the economy from getting knocked off course, governments are beginning to intervene by injecting liquidity. This takes two forms: Pumping liquidity into the country’s financial system via open market operations like quantitative easing (or printing money), and lowering interest rates to encourage borrowing and investing.

But because these economic measures have become standard practice, they are losing their potency. Governments are now getting desperate and making ever more extreme measures to keep the market lurching upwards 

China was the first to react by injecting 1.2 trillion yuan (US$174 billion) into the markets and cutting rates at the first sign of trouble. In the U.S. the Fed has also been feeding the stock market with piles of freshly minted digitized money, and is expected to keep cutting interest rates as the year goes on. 

But, as interest rates are so near zero already, rate cuts are unlikely to have much effect, and so some countries are already resorting to more drastic measures.

Helicopter Money—where money is printed and given directly to the public—is becoming standard practice. 

Hong Kong has gifted HK$10,000 in cash to residents (1,200), Italy is suspending tax and mortgage payments in the virus zone, and even the White House is weighing up the idea of sending cheques directly to those in need.

This added liquidity can prop up the market for a short time, however it can’t mitigate the effect of the virus on local businesses, and it can’t replace lost incomes. Instead, it makes businesses dependent on an ever expanding debt load.

As Caitlin Long suggests, the coronavirus could end up highlighting how ineffective these economic stimulus measures are, and — as govts realise they cannot stall the pandemic with liquidity— end up being to China or the U.S. what the Chernobyl nuclear accident was to Soviet Russia — a catalyst tipping a precarious economy over the edge into crisis.



Comic: Fighting CO-VID 19 by Chapatte.

How to protect your portfolio

The recent crash shows that holding equities inflated to the tune of the Fed balance sheet is dangerous, with gains liable to be wiped out in an instant. 

But… holding cash is equally treacherous. Economic stimulus measures like constantly pumping liquidity into markets around the world increases the global cash supply — turbocharging inflation.

To guard against this, the typical route of investors is to park funds in tried-and-tested safe haven assets like gold and bonds.

But even the trusted safe haven status of bonds is now under threat. As we move into an era of increasing negative interest rates, we have more negative yielding bonds, which means you are literally paying the government for the privilege of lending them money.  The yield on the U.S. 10-year Treasury fell to a historical low of 0.38 percent on March 8, and German and other European bonds have long since been negative.

The only asset that is immune to both quarantine-induced economic downturn, and the side effects of looser monetary policy around the world, is gold.

Despite heavy volatility, gold typically holds up as other assets fall. Since the first cases of coronavirus on December 31st, gold has been subject to heavy volatility, but has managed to remain buoyant as other assets have fallen sharply. 

This echoes the performance of gold during previous outbreaks, like the H1N1 swine flu of 2009 in which gold appreciated 39%, and the Zika epidemic of 2015 and 2016, during which the yellow metal rose 21%.

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