March 13, 2020

COVID-19 novel coronavirus – this time it is serious

In our Investment Notes 1/2020 on 5 March, we categorised the effect of the COVID-19 novel coronavirus into the following phases:

  1. The initial outbreak occurs on 1 December 2019 in Wuhan, China.
  2. Late January 2020, financial markets react cautiously to the uncertainty of the outbreak contained in China (we call it the firest downward market wave).
  3. In February 2020, the impact on the real economy starts to become evident as factories close, people are asked to remain at home (second downward market wave).
  4. The virus spreads to other geographies (e.g Iran, Japan, Italy) and there is a realisation that the outbreak of the COVID-19 novel coronavirus is likely to be of truly global proportions.
  5. There is a local outbreak of the coronavirus in largely unprepared geographies, e.g Southern Africa.
  6. This is likely to give rise to a third downward market wave, premised on decreases in global productivity.

Our expectations were based and modeled on how the world and financial markets reacted to the outbreak of:

  1. SARS (Severe acute Respiratory Syndrome) in 2003;
  2. Swine flu (H1N1) from 2009 to 2010;
  3. Camel flu (MERS) in 2012;
  4. Ebola Epidemic (EBOV) in 2013; and
  5. Bird Flu (h5n1 AND h7n9) from 2013 to 2016.

The outbreak of these epidemics was largely contained and the impact on financial markets relatively short-lived.

Since 5 March 2020, it appears from reports coming from China, that the rate of infection and the Case Fatality Rate have dropped off. This is not because we’ve seen the end of the pandemic, but because of quicker diagnosis and isolation of those infected.

Elsewhere in the world, COVID-19 infections are spreading at a much higher than expected rate, especially in Italy. In the United States, President Trump announced a 30-day blanket ban on arrivals from Europe. The World Health Organisation (WHO) labelled COVID-19 coronavirus a “pandemic” on 11 March 2020.

This means that the impact on markets is much more serious than we could have anticipated. As long as the news flow remains negative, equity markets are likely to remain volatile.

According to studies, the overall case fatality rate of COVID-19 novel coronavirus infections is 3.4%, in other words 34 out of every 1 000 people who contract the virus die from it. The case fatality rate is different for different age groups.

A study in Wuhan, China (the epicentre of the outbreak) showed the following Case Fatality Rates:

  • 14.8% in people aged 80+;
  • 1.3% in people aged 50-59;
  • 0.4% in people aged 40-49; and
  • 0.2% in people aged 10-39.


Epidemiologists now compare the outbreak of the COVID-19 novel coronavirus with the Hong Kong flu (H3N2) from 1968 to 1969 and the Spanish flu (H1N1) from 1918 to 1919.

Results of a recent study undertaken by Professor Warwick McKibbin and PhD student Roshen Fernando of Australian National University’s Crawford School of Public Policy suggest that the South African population is at risk of suffering a higher case fatality rate from the COVID-19 novel coronavirus than some other geographies around the world because of:

  1. the existence of comorbid conditions (e.g tuberculosis, HIV+);
  2. strained pharmaceutical supply chains from China; and
  3. reduced access to emergency funding from IMF (South Africa is classified as an upper-middle-income country).

Source: Wikipedia defines comorbidity as follows: “In medicine, comorbidity is the presence of one or more additional conditions co-occurring with (that is, concomitant or concurrent with) a primary condition; in the countable sense of the term, a comorbidity (plural comorbidities) is each additional condition. The additional condition may also be a behavioural or mental disorder.”

In terms of our original expectations, we are now in phases 4 and 5; and there is the risk that the impact of the COVID-19 novel coronavirus may be more severe than we had anticipated.

So what now?

Firstly, besides looking at the impact of the COVID-19 novel coronavirus on financial markets and retirement funds, the pandemic remains a human tragedy and each person and family should take care to prepare themselves.

Secondly, we cannot say what the full impact of the coronavirus is likely to be. Even though we expected pressure on the oil price, we didn’t foresee that it would fall to USD30 per barrel, nor did we expect the implosion of the Sasol share price.

Similarly, there are many risks and an untold number of things that can go wrong.

What we do know, is that one should look through current events to take a longer-term view. History has taught us that, in time, there will be a recovery in financial markets as the COVID-19 novel coronavirus is brought under control eventually.

Many retirement fund members ask if they should sell or reduce exposure to growth portfolios at current levels. The answer is no, selling now leads to locking in losses – one should stick to one’s long-term strategy. Equally, there are those who ask if they should buy at current depressed levels. The answer is no, it takes a brave person to wade into the market just yet.