Gurus Weigh In on the Potential Economic Impact of the Coronavirus Outbreak

As new cases of the coronavirus, or Covid-19, continue to be reported around the world, investors and the general public alike are becoming increasingly concerned about the short as well as long-term effects it will have on the economy. Last week, the U.S. stock market recorded its fastest correction since the 2008 financial crisis, with the Nasdaq Composite falling 7.3%, the S&P 500 Index declining 8.9% and the Dow Jones Industrial Average returning 9.7%.

Due to the continuing uncertainty, several gurus have weighed in on the potential impacts the outbreak will have on their investments as well as the market.

Among the first to comment on the coronavirus outbreak was First Eagle Investment (Trades, Portfolio). The New York-based investment firm said it “represents a significant shock to both supply and demand in China” and will likely “have repercussions for both Chinese and global economic growth.” The firm also noted that although the fatality rate so far has been relatively low, the timeline for the country’s “return to normalcy” remains unclear.

It also provided some insight into the impact the outbreak could have on the U.S.-China phase one trade deal:

“Meanwhile, China had committed to buying an additional $200 billion worth of goods from the U.S. over the next two years as part of the ‘phase one’ trade deal between the two countries. Though it seems highly unlikely China will be able to make good on this pledge given the economic impact of the coronavirus outbreak, the effect on trade tensions remains to be seen.”

Matthews Asia investment strategist Andy Rothman also weighed in on the potential impact of the virus on China’s economy in his Sinology blog.

While he made sure to point out that past performance is no indication of future results, Rothman said to get a sense of how the Chinese economy might respond to the current outbreak, the firm looked back at the impact of the SARS outbreak in 2002-03 as well as the 2005-06 bird flu epidemic.

“Our main conclusion is that after a sharp, short-term negative impact, the Chinese economy rebounded quickly,” he wrote. “There was also little impact on the Shanghai stock market.”

Oakmark Funds’ Win Murray approached the potential impacts on the firm’s long-term investments from a slightly different angle, focusing on cash flows.

“If 2020 cash flows for the entire market dropped all the way to zero, the aggregate value of the market should only fall by 4%-5%,” he wrote. “Therefore, we believe the proper question to ask when analyzing the coronavirus (or any emerging macro risk) is ‘How much will this affect the long-term cash flows of businesses?’ I doubt very much that the owner of a thriving family business would accept a dramatically reduced offer for her entire company today versus two months ago simply because of virus fears.”

When bringing the impact of epidemic fears over the past two decades into consideration, he wrote, “world economies adjusted to the threats without seeing significant impacts to long-term cash flows.”

In addition, he found that within the two months following each of the observed outbreaks, the S&P 500 Index “exceeded its pre-outbreak high.”

Charles Brandes (Trades, Portfolio)’ Brandes Investment Partners said in a note that it has found “global market shocks have generally created opportunities in specific businesses or entire sectors.” As a result, the San Diego-based firm said investors should avoid “indiscriminate selling” based on unsettling short-term volatility and instead look for investment opportunities among companies that have attractive long-term prospects and are trading at discounted prices.

Ken Fisher (Trades, Portfolio)’s Fisher Investments also feels the long-term impacts will likely be minimal this time around. In a weekly market commentary, the firm’s editorial staff noted that “while the coronavirus is certainly a human tragedy and will have some short-term economic impacts, the current decline has all of the classic features of a correction—a short, sharp drop of 10% or more accompanied by scary, seemingly plausible news stories.”

In that regard, Wallace Weitz (Trades, Portfolio), head of Omaha, Nebraska-based Weitz Investments, said in a note that it is “important not to overreact to news events” and recommended investors not make decisions based on headlines.

“Historically, events that have caused selloffs based on fear and uncertainty have soon faded into the background,” he added. “As the news continues to unfold, we believe the best course of action for long-term investors is to remain calm and stay invested.”

Weitz also cautioned that while past epidemics have had minimal long-term effects on the economy, there is no guarantee the markets will be able to completely shake off the latest outbreak.

In an interview with CNBC’s Becky Quick last week, Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio) also recommended investors stay in the market as the potential pandemic has “not changed” his long-term outlook.

“It is scary stuff,” he said. “I don’t think it should affect what you do in stocks.”

Buffett’s longtime business partner, Charlie Munger (Trades, Portfolio), agrees. In February, he told investors at the annual shareholder meeting for the Los Angeles-based Daily Journal Corp. (DJCO, Financial) that he thinks the decline in innovation will prove to be more harmful to the market in the long term than the coronavirus.

“I think there are a lot of troubles coming,” he said. “There’s too much wretched excess.”

Markets started to recover on the first trading day of March, with the Dow Jones soaring 4.32%, the S&P 500 gaining 3.90% and the Nasdaq climbing. 3.64% Monday afternoon.

Disclosure: No positions.

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• Bill Ackman Continues to Chip Away at Largest Holding
• The Top 5 4th-Quarter Buys of Philippe Laffont

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