Investors woke to a sea of volatility on Monday morning, as concern over the possible extent of the impact that the COVID-19 could likely have on world economies heightened significantly. Apart from the postponement of highly anticipated Serie A games, which I’m sure irked many Maltese individuals, Italy reported a significant increase in the number of infected cases and reported deaths, the most worrying of which were related to the cases which could not directly be traced back to China, the origin of the virus outbreak.

Villages in the Lombardy region in Italy were forced into lockdown, with authorities ordering the cancellation of events that involve mass gatherings, including schools and bars. There were also significant increases in cases in countries like Iran, Singapore and South Korea, as well as first incidences in a host of other countries.

Asian equity markets closed down around two per cent across the board on Monday and are currently also trading in the red, with European equity markets down around four per cent on Monday and are also down this morning.

The Italian FTSE MIB was down six per cent on Monday and is marginally down again this morning after confirming its seventh death overnight. Over in the US, the major equity indices closed down around 3.5 per cent across the board. The airline industry was hit hard, with companies issuing profit warnings, sending share prices down in double figures.

On the flip side, investors flocked to the traditional safe haven assets, with the dollar, gold and AAA rated sovereign yields all posting gains, and proving their worth to investor portfolios during times of distress. Commodities were not spared any punishment, with oil and soft commodities down.

There have been some lessons to be learnt over the past two weeks. The markets are finally reacting ‘normally’ to negative news, and the unstoppable charge towards weekly new highs despite obvious fundamental pitfalls has been checked. The writing was on the wall for the equity markets for over a week, with the dollar and gold prices steadily strengthening, and yet no reaction from the equity markets. This inertia has been promulgated by expansionary policies by central banks worldwide, which have desensitised investors to negative news, who are now accustomed to the invisible hand of central banks to intervene when the going gets tough.

The question is where we go from here. Given the uncertainty surrounding the spread of the COVID-19 virus, it is reasonable to expect markets to remain on the fence until a semblance of normality is resumed across the globe.

Encouragingly, the number of new daily cases in China seems to have subsided, with workers returning to workplaces under controlled conditions. If this level of containment can be maintained across the globe, I believe it will prove to be an attractive entry point for risk assets. Furthermore, as more clarity over the fatality rate of the virus is revealed, the level of fear may subside. The estimated mortality rate stands at around 0.5 to four per cent compared to the 0.2 per cent of the normal influenza virus, however these figures are still highly questionable.

The biggest issue is one of containment. Europe is only just starting its cycle of response to the outbreak, with the potential of several more countries experiencing disruptions that are not being reflected yet. The going can potentially get even rougher if the US mainland is affected. In my opinion, it is a matter of time.

There will reach a point where governments will need to trade-off between trying to contain the virus further, versus inflicting severe economic pain on the economy. Until we get there, buckle up as it can well prove to be a bumpy ride.

This article was issued by Simon Psaila, investment manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.