Despite some recent falls, share markets are still relatively high. But there are serious threats looming. In addition to the coronavirus outbreak, economist Nouriel Roubini, who predicted the 2008 crash, has warned of multiple threats to the global economy.
There is much that we don’t know about the coronavirus, but we can say that it appears to be extremely contagious. Earlier this month, UK Health Secretary Matt Hancock said that coronavirus infections are doubling every five days. There is very cold comfort in knowing that the fatality rate is low.
The economic impact could be far reaching. The International Monetary Fund expects the Chinese economy will return to normal in the second quarter, and is projecting that the coronavirus will knock 0.1% off global growth this year. I have my doubts about both these predictions, and fear the consequences for millions of indebted Chinese small businesses.
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From the perspective of an investor, I think people’s fear – market sentiment – will have a larger impact than the outbreak itself.
Dr. Doom
Nouriel Roubini, an economics professor from New York University Stern School of Business, is often called Dr. Doom. He predicted the 2008 crash more accurately than anyone. He also believes that the coronavirus is just one of several threats that the global economy will face this year.
Roubini predicts there will be an escalation in tensions between the US on one side and China, Russia, Iran, and North Korea on the other. The coronavirus itself may play a role in this, by encouraging the US to impose more barriers to trade with China. Roubini warns that China may respond by selling US Treasuries and buying gold. Roubini also fears an escalation of cyber warfare combined with state-sponsored fake news during the US election.
What to do
Just because Roubini was right about the 2008 crisis, it doesn’t mean that he is right about this. Stock market valuations, even after recent falls, don’t seem to reflect these downside risks. Providing everything goes swimmingly well, stocks may continue to rise — but, if even just a small part of Roubini’s predictions prove correct, then we might see a big fall in stock markets.
What should investors do? No two crises are ever the same. Post 2008, certain companies recovered quickly. I think this time banks would be much better able to weather any storms given the regulatory changes enacted following the 2008 crisis.
Gold is an obvious potential beneficiary given what Roubini said. I would say that, post-crisis and even mid-crisis, we would see a continuation of the pre-crisis trend of flourishing online retail. Ocado and Boohoo, for example, would likely continue to do well. Home entertainment, such as video games and subscription TV, may prove to be popular.
If concerns about the impact of the coronavirus and other threats to the global economy on your portfolio, then consider some of these defensive plays.
