Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 347

Lessons from a century of virus plagues

Last month, traders seemed to be shrugging collectively at the coronavirus in assuming China had been largely successful containing the outbreak to epidemic rather than pandemic levels.

How quickly things change. Markets plunged at the end of February after reports of outbreaks in Japan, South Korea, Italy and Iran. As we can see below, traders shifted (at least temporarily) from complacency to panic.

However, volatile and unpredictable markets have more recently delivered two 4% rallies in the US in three days after Congress authorised virus prevention spending and the Federal Reserve cut interest rates. Share prices will remain under pressure as analysts consider how coronavirus will affect company earnings and the broader global economy.

The good news for investors is that the world’s governments are hell-bent on avoiding recession. At first, Australia's Prime Minister Scott Morrison had ruled out fiscal stimulus to prop up the local economy, but soon changed tack as he floated the option of stimulus to combat a global pandemic.

The challenge of the coronavirus is that it isn’t deadly enough.

The H5N1 avian flu has a mortality rate of 60%, but because it is so deadly there are few opportunities for widespread infection.

On the other hand, the common flu has a mortality rate of less than 0.1% but is easily spread due to its relatively mild symptoms. Most people don’t experience severe symptoms with the coronavirus, meaning they are likely to infect others before being diagnosed.

When major news outlets are running headlines like this, it’s little surprise that investors are wondering whether they should be battening down the hatches.

For long-term investors, the question is whether the coronavirus is going to have lasting implications for investor portfolios.

Investing timeframes should be years and decades, not days and weeks, and markets cannot be timed perfectly. As we can see below, failing to time the markets correctly is a costly proposition.

Comparing previous virus plagues

There have been three major pandemics over the past 100 years, which have killed millions of people not just the odd thousand or so. In terms of their effect on share markets, the chart below shows the total returns including dividends but after inflation for Australian (green) and US (red) shares since 1900.

1918-19 ‘Spanish’ flu A/H1N1

The victims of the 1918-19 Spanish Flu were mainly healthy individuals between 20- and 50-years-old, in stark contrast to other pandemics that affected mainly infants and the elderly.

Spanish Flu was first observed in Europe, the US and across Asia but swiftly spread around the world.

In Australia, 40% of the total population was infected and 15,000 people died. We had one of the lowest death rates globally, at just 2.7 deaths per 1,000 population. The Federal government set up the Commonwealth Serum Laboratories (now CSL) near the end of the War to develop local vaccines and its first major success was a vaccine for Spanish Flu.

Despite infecting one third of the world’s population, killing 50 million people and hospitalising hundreds of millions more, the impact on share markets was limited.

In the immediate post-war years, share markets were hit by a massive bout of post-war inflation (20%+ in Australia and the US) and equally damaging fiscal and monetary tightening to fight inflation. If anything, the deaths of 50 million people and spending cuts by hundreds of millions who were infected may well have prevented the inflation spikes from being worse than they turned out to be.

In any event, once the inflation was brought down by sharp recessions in 1920-21, share prices took off and started the long 1920s boom driven by post-war housing, urbanisation and new technology – motor cars, radios and other household appliances.

1957 ‘Asian flu’ A/H2N2 virus

It is thought to have started from animal and human H1N1, and avian H2N2 virus strains, in China's Yunnan province before spreading through Hong Kong to the rest of the world. The Asian flu killed between 1 million and 2 million people worldwide, mainly infants and the elderly, including 70,000 Americans but only 2 in Australia.

Shares were unaffected by the crisis and kept rising in Australia and the US during the great 1950s post-World War 2 boom that was fuelled in both countries by housing, infrastructure and consumer finance – not unlike the 1920s post-WW1 share boom.

1968-70 ‘Hong Kong flu’ A/H3N2

This pandemic came in two waves across the world, the first in 1968-69 and second in 1969-70. It is thought to have originated as a mixed infection of an animal with human H2N2 and avian H3Nx virus strains in Asia. It killed around 1 million people globally, mainly elderly, including 34,000 Americans and 2,400 Australians.

At the time, share markets were enjoying the 1960s ‘space race’/ aeronautics boom in the US. This surge triggered the speculative mining boom in Australia, especially in metals like nickel which was used in aeronautics, and was also in high demand for armaments in the Vietnam War.

2009-10 – ‘Swine Flu’ or ‘Mexican flu’ – H1N1

This originated in Mexico and spread around the world, infecting between 700 million and 1.4 billion people and killing about 200,000, mainly the young, including 12,000 Americans and 1,600 Australians.

For shares, 2009-10 was of course the great rebound from the GFC share market crash. Share prices powered through the flu pandemic and other crises including:

  • the European bank runs
  • first Greek debt bailout
  • Iceland and Irish bankruptcies and bailouts
  • Dubai debt crisis.

Where to from here?

No cure or vaccine for the coronavirus has been developed yet, so the infection rate and death toll are probably going to keep spreading rapidly. But the rate of spread appears to be slowing.

In January the growth rate of infection was running at 50% per day, but fell to 30% per day in early February, and now appears to be 15% per day (on official figures anyway).

The growth rate makes a difference.

At 50% per day it would take just 30 days to infect the entire world population.

At 30% per day it would take 45 days; and at 15% per day it would take 85 days.

If not contained, at 5% per day it would take 250 days to infect the whole world.

More likely outcomes would be a continued slowing in the rate of spread of the infection, and/or containment or vaccine.

Most of the impacts are likely to be short term, either pulling spending forward that would otherwise have been spent later (eg purchases of food, durable goods stockpiled, vitamins, etc), or delaying spending that would be picked up later (factory production, car purchases, travel, etc).

Long-term investors should be focussed on more long-lasting or permanent changes.

50 million people dying of the Spanish Flu took 50 million potential workers and consumers out of the market permanently, but that was right at the start of the tremendous 1920s boom.

Likewise, the 1-2 million people taken out by the late 1950s Asian flu and the late 1960s Hong Kong flu, plus tens of millions infected temporarily in each case, had little impact on markets.

On the other hand, the 1340s-50s Black Death that wiped out one fifth of the global population including at least one third of Europe no doubt would have had large and long-lasting effects on economic output, company profitability and the holders of government and corporate debt.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information purposes only and does not consider the circumstances of any individual.

 

5 Comments
Phil
March 09, 2020

The chart provides great long term perspective, no doubt. But generally that is not the problem, the problem is in that acute 18 months to 2 years before the boom recovery where investors lose the faith or become insolvent, lose jobs etc. Where the practicality begins.

Josh
March 09, 2020

"On the other hand, the 1340s-50s Black Death that wiped out one fifth of the global population including at least one third of Europe no doubt would have had large and long-lasting effects on economic output, company profitability and the holders of government and corporate debt."

considering "company profitability" in the face of the black death is an odd slant to be interested in...

But anyway, it is interesting to compare to your statement that 50 million deaths from the Spanish flu preceded the booms of the 20s.

In fact, the Black plague of the 14th Century fundamentally changed the course of human history, as it dramatically increased the prices of wages, particularly in western Europe. Of course, the impact would not have been immediate, but it can't be too coincidental that a generation or two later, in the middle of the millenia, we start seeing huge leaps in living standards, which spurred giant leaps in science and technology shortly thereafter.

SMSF Trustee
March 11, 2020

No antibiotics in the 14th century, or even during the Spanish flu. Many deaths in the latter were from World War 1 injured people who couldn't cope with getting the virus, or from secondary infections for which there was no treatment. Not saying medicine solves all problems, but these simplistic historical comparisons are actually not helpful guides to understanding the COVID19 situation.
Please, let's stop talking ourselves into unnecessary worry.

Let's not blame the virus for the fall in the stock market or the possible economic recession that it's foretelling. Let's blame human behaviour - both the poor response of governments to the situation, and the ridiculous fear reactions of so many people.

Lisa
March 05, 2020

Can you add comment about SARS and Ebola, and the Zika?

Steve
March 05, 2020

Then there's always this:


Six Reasons Why Covid-19 Fails The Sniff Test
https://www.zerohedge.com/health/six-reasons-why-covid-19-fails-sniff-test

 

Leave a Comment:

     

RELATED ARTICLES

Decide if 'fake crises' are worth the worry

COVID-19 and the madness of crowds

What does the 'fear gauge' VIX really mean?

banner

Most viewed in recent weeks

Who's next? Discounts on LICs force managers to pivot

The boards and managers of six high-profile LICs, frustrated by their shares trading at large discounts to asset value, have embarked on radical strategies to fix the problems. Will they work?

Four simple things to do right now

Markets have recovered in the last six months but most investors remain nervous about the economic outlook. Morningstar analysts provide four quick tips on how to navigate this uncertainty.

Welcome to Firstlinks Edition 374

Suddenly, it's the middle of September and we don't hear much about 'snap back' anymore. Now we have 'wind backs' and 'road maps'. Six months ago, I was flying back from Antarctica after two weeks aboard the ill-fated Greg Mortimer cruise ship, and then the world changed. So it's time to take your temperature again. Our survey checks your reaction to recent policies and your COVID-19 responses.

  • 9 September 2020

Reporting season winners and losers in listed property trusts

Many property trust results are better than expected, with the A-REIT sector on a dividend yield of 4.8%. But there's a wide variation by sector and the ability of tenants to pay the rent.

Have stock markets become a giant Ponzi scheme?

A global financial casino has been created where investors ignore realistic valuations in the low growth, high-risk environment. At some point, analysis of fundamental value will be rewarded.

Every SMSF trustee should have an Enduring Power of Attorney

COVID-19 and the events of 2020 show why, more than ever, SMSF trustees need to prepare for the ‘unexpected’ by having an Enduring Power of Attorney in place. A Power of Attorney is not enough.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 376

The US tech index, the NASDAQ, peaked on 2 September 2020 at 12,058 and three weeks later closed at 10,632. On the same days, Apple hit US$137.98 and then fell to US$107.12. These falls of over 10% and 20% seem high but both were simply returning to their early August levels. It's hardly a rout when a month's gains are given back. The bigger issue is whether such stock corrections will scare off the retail 'Robinhood' traders.

  • 24 September 2020
  • 2
Interviews

Interview on new technologies with more potential to grow

For many global tech companies, COVID has boosted their revenues and pushed share prices to all-time highs. We are on the cusp of amazing technical advances and there are plenty of new opportunities.

Shares

Five reasons why Tesla is the everything bubble

As fewer professionals actively research the merits of a company’s prospects, stocks become disproportionately driven by capital flows. Prices disconnect from fundamentals and there's no better example than Tesla.

Retirement

Three retirement checks for when you have enough

Not every retiree needs to gun for higher returns, but a conservative portfolio can court its own risks, especially with bond rates so low. But some retirees prefer to settle for a lower income.

Shares

Hide and seek: the FX impact on global equity investments

As more Australians tilt their investments to global equities, they often overlook the exchange rate risk and fees. The move from US57 cents to US73 cents in six months shows the unhedged impact.

Economy

When America sneezes, the world catches a ...

The recovery from COVID-19 is looking more like a K-shape, with some companies doing well while others struggle. The pandemic seems more akin to a black swan, exogenous shock than a structural downturn.

Retirement

How the age pension helps retirees cope with losses

It's often overlooked how wealthier couples can fall back on the age pension if a market loss hits their portfolio. The reassurance is never greater than in a financial (and now epidemic) crisis.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.