Why managing risk is more important than ever: The impact of Coronavirus
DISCLAIMER: This news is changing daily and a number of the facts in this article are constantly evolving but the principles remain the same.
The rapid spread of COVID-2019 (Coronavirus) is raising concerns and many believe we are on the brink of a global pandemic. Experts claim we are at ‘tipping point’ and the likeliness of the spread of the virus slowing down is rapidly declining. The most obvious and important casualty of this illness is of course human life, but the knock-on effects are far wider reaching. Some say the World Health Organisation (WHO) are putting off declaring a global pandemic due to the potentially catastrophic economic fallout.
According to the World Bank, the annual global cost of moderate to severe pandemics is about $570 billion (about £440 billion) or 0.7 per cent of the world’s income. (reference: The Telegraph 210220)
Coronavirus has the potential to be far more destructive than anything we have ever seen in the Western world. As we all know the virus originated in China and in the last 3 months their economy has shrunk. China accounts for 1/5 of the global economy and 1/3 of its growth. It is the largest export economy in the world – supplying the majority of the world’s broadcasting equipment, computers, office machine parts, integrated circuits and telephones. It’s top imports are integrated circuits, crude petroleum, iron ore, cars and gold.
We can all try to act cool and pretend like Coronavirus is just another moment in history but if you think that business globally will continue as usual – you’re mistaken. Even if we found a cure tomorrow and were able to produce, distribute and administer the vaccine across the world in days (highly unlikely), then the impact on the global economy is still huge.
So far China has been hit the hardest, it is reported they have lost $29 billion in airline revenues and their auto sales are down 92%! However, Italy has also reported major outbreaks over the weekend, as has Iran and Spain. In light of the realisation that a global pandemic is likely the Dow Futures dropped nearly 700 points. Investors are now starting to worry and whilst it’s still a bit early for quality statistical data – what happens in the markets is always a fairly strong indicator of what’s to come. Crude oil prices have fallen as has April Brent Crude. Investors have turned to Gold as the forex market becomes increasingly volatile. The Japanese Yen once viewed as a safe haven is now suffering due to its close proximity to China.
Today’s supply chain is global and only 1/3 of corporations are believed to have ‘what-if’ analysis capabilities and teams capable of modelling the ever-changing impacts of the virus. Two-thirds of companies do not even know the locations of their second and third-tier suppliers – do you? The global supply chain is so complex that the solutions are not straight forward, even once we have found a cure and the population is safe, the recovery will be long and troubled. For example, let’s just say the virus is contained to Asia, Italy and Iran… Whilst most large firms could potentially diversify their supply chain to stay afloat, the smaller firms will struggle. In the US alone, of their 28.7 million registered businesses, 99% are deemed to be ‘small companies’ and account for around 40% of GDP. The long-term logistical and credit risk impact of these firms failing will be devastating, increased unemployment, reduced demand on goods and services, it goes on…
It’s still very early days – Coronavirus has not reached its peak. The economic impacts are so complex and intertwined that there is no right or wrong answer when it comes to investment. There is no plan B for most but what you can do is understand and manage your risk effectively. Investors need now more than ever to be able to understand their exposures in terms of market, liquidity and credit so that they can make informed decisions.