Could the Coronavirus Impact Your Investments?

How is the Coronavirus impacting the World Economy and your personal investments?

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The coronavirus is one of the biggest stories in the media and on the internet. But how much of what we're exposed to is fact — and how much is fear-mongering? Unfortunately, it's hard to know the difference when what we're facing is an easily transmitted virus with no known cure. As well as being concerned about the obvious health implications, we may also need to consider how the coronavirus may impact the world economy and our investments.

As a matter of pure speculation — because there's too much we don't know at this point — we're going to attempt a reasonable discussion of both the economy and investing in light of the coronavirus.

This is not meant to minimize the more important concerns about the potential number of lives the virus may ultimately claim. But the impact of any illness, particularly a pandemic, has the potential to affect every corner of human existence. That includes the economy and our money investments, and those can't be ignored either.

What Is the Coronavirus?

According to the World Health Organization (WHO), the coronavirus (CoV) is a large family of viruses that cause illnesses ranging from a common cold to Middle East Respiratory Syndrome (MERS-CoV) and Severe Acute Respiratory Syndrome (SARS-CoV).

The virus primarily affects the respiratory system, causing fever, cough, shortness of breath and difficulty breathing. In its more severe forms, it can cause pneumonia, severe acute respiratory syndrome, kidney failure and death.

At the moment, there's neither a cure for the virus nor any sort of vaccination. The only preventative strategies known are washing your hands regularly, covering your nose and mouth when coughing or sneezing, thoroughly cooking meat and eggs and avoiding close contact with anyone who exhibits respiratory distress, including coughing and sneezing.

In short, the identifiable symptoms of the coronavirus are so common they can easily cause people to change their behavior and become more cautious. And as much as those activities may be aimed at preventing getting the virus, there's a real potential for them to affect both the economy and your investments.

How the Coronavirus Could Impact the World Economy

The economic impact of the coronavirus is centered primarily on China, at least at the moment. Evidence is mounting that the virus is already having a material effect on China's economy.

China has the world's second-largest economy, after the United States. But China is also the world's leading manufacturing country, supplying many of the goods being used around the world. In fact, according to data from the United Nations Statistics Division, China accounted for 28% of the world's manufacturing in 2018.

Manufacturers around the world are already experiencing a shortage of parts generally manufactured in China. China is, after all, the starting point of many of the world's manufacturing supply chains.

The disruption of Chinese goods was already occurring due to U.S. tariffs. But the situation has been made worse by the reduction in manufacturing capacity due to coronavirus-related quarantines.

Although Chinese factories are beginning to come online, it's estimated that they are working at only 30% to 50% capacity. Analysts are predicting a decrease in economic growth for the first quarter of 2020 by as much as 3.5%. And analysts with the Guggenheim Partners are predicting that China's GDP for the quarter will fall by 6%.

The virus is still very early in its progression, and exactly how far it will go can't be reasonably estimated at this point. However, it already has an effect that could impact the economy, at least in the near term. But should the virus spread globally, the impact could be more far-reaching and long-lasting.

Complicating the practical impairments caused by the virus are the fear and panic components. As long as the virus is in a growth spiral and lacks any credible treatment options, the psychological and emotional impact it will have on people and their behavior will only magnify the situation.

The Fear-and-Panic Impact

While mechanically we may be concerned with disruptions in manufacturing supply chains and a decline in international tourism, economic conditions can conceivably get much worse if fear and panic cause people to reduce activity and hoard financial resources to prepare for the worst.

For example, a panicked public is likely to delay major purchases such as autos and homes. Since those are major industries, they have a ripple effect on the rest of the economy.

How far that can go can be projected but not with any precision. And uncertainty alone is a negative for the economy.

How the Coronavirus Could Impact Your Investments

Barring widespread panic and a general selloff in assets of all types, the coronavirus could hit specific sectors and companies selectively.

Obviously, any company or industry with strong ties to China could be hurt by an anticipated or actual economic slowdown in China. Even companies operating entirely outside China could be affected.

A significant slowdown in the sale of homes and autos will hurt any industry remotely connected to either activity. But the same may occur with consumer discretionary spendings such as jewelry, furniture, and even clothing. All could give way to consumer's desire to stock up on cash or even pay down debt out of fear of the unknown.

But if the coronavirus begins hitting close to home, tourism and entertainment could be hit especially hard. Consumers may avoid going to restaurants, movie theaters, casinos, concerts, and sporting events to minimize contact with others who may be infected.

The restaurant sector could be seriously affected. Fear might develop that the virus can spread through food prepared or handled by infected individuals.

On the tourism front, people may cancel travel plans, in part to avoid the close quarters that come with air travel, as well as the risks associated with traveling to either crowded tourist hotspots or foreign countries where the virus may be more widespread.

Investments That Could Benefit From the Coronavirus

Some investments could suffer from the coronavirus, but some also could benefit from it. Determining which ones have this potential depends mainly on the path the disease takes.

If you're not concerned the coronavirus will become a significant economic and financial issue, you may want to build up your cash reserves until more definitive information becomes available. Probably the best way to do that right now is through high-yield savings accounts and money markets, as well as certificates of deposit offered by online banks. Not only will they enable you to keep your money safe, but they'll also keep it available as investment opportunities come into focus. Here are some high-yield savings accounts you can start with:

If there's one sector likely to benefit from a significant spread of the coronavirus, it's undoubtedly healthcare.

Individual companies worth investing in might include:

  • Johnson & Johnson (JNJ), one of the world's largest healthcare companies, is engaged in research and development, manufacture and sale of pharmaceuticals, medical devices and supplies likely to be increasingly necessary for combating a global virus.
  • McKesson Corp. (MCK) is a diversified healthcare company engaged in supply chain management, retail pharmacy, specialty care and healthcare information technology.
  • Cardinal Health (CAH) is a wholesale distributor of pharmaceuticals, medical supplies and surgical supplies.

If you're not certain about investing in individual stocks, you should consider healthcare exchange-traded funds (ETFs). Two of the largest are Health Care Select Sector SPDR ETF (XLV) and Vanguard Health Care ETF (VHT), both of which invest in general healthcare-related companies.

Biotechnology companies may also be a play on research and development for a cure for the virus. One of the top biotech funds is iShares Nasdaq Biotechnology ETF (IBB)

More Speculative Investment Plays on the Coronavirus

It's far too early to make any definitive calls regarding the coronavirus. But there may be more direct ways to profit from the virus should it advance to anything resembling the Spanish flu epidemic of 1918.

For example, large pharmacy chains, like Walgreens (WBA) and CVS (CVS), could take off if there's a rush toward prescriptions that might be effective against the virus. However, at present, there is no known cure or prevention for the coronavirus. If none is forthcoming, pharmacy chains could prove to be no better than the general market.

However, should the virus turn into a pandemic affecting tens of millions of people in dozens of countries, it would likely hurt economic activity at nearly all levels. Should it reach that point and panic sets in, investors may turn to the ultimate crisis investment: gold.

Probably the best way to invest in gold, should the virus reach those proportions, would be through an ETF that holds the metal directly. The two largest gold ETFs are the SPDR Gold Trust (GLD) and iShares Gold Trust (IAU).

The ETFs would avoid the need to take physical possession of gold and also avoid including gold stocks in some other fund, much as is the case with gold-mining mutual funds. Even if gold were to take off, mining companies could be negatively affected by the uncontrolled spread of the virus in remote regions of the world where infections travel fast and quality health care is hard to come by. However, if the virus reaches that level, expect hard-sell advertising from the gold crowd for investors to get into all things gold, including the most speculative investments, though it may not work in this case.

Final Thoughts on How the Coronavirus Could Impact Your Investments

At this point at least, there isn't sufficient information on the coronavirus to support making significant changes in your investments. The real issue right now is uncertainty. The coronavirus looks like it has the potential to have a massive impact on the world economy and your investments. And while that is possible, it's also likely the impact could come to nothing. After all, the discovery of a cure would undoubtedly change the entire dynamic.

For now, it's best to maintain your existing long-term investment strategy. But if the virus looks like it's moving to more advanced levels, you may want to begin shifting some of your portfolios into some of the investment recommendations in this article.

In the meantime, try not to be too affected by the doom and gloom that's coming out of many quarters of the media. While such fear certainly gets eyeballs on articles and newscasts, the media doesn't necessarily report the real facts of the situation. Keep calm and focus on the long term, but be prepared to make adjustments along the way.

As has been the case with every other pandemic threat in our lifetimes, we'll get through this one too.

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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