Looks like the markets might finally be reacting to the possible impact of COVID-2019

After doing some 'rebalancing' on 6 Feb in response to the developing corona virus outbreak, it appears that 'Mr Market' has finally reached the same conclusion as me - that while the economic impact of the corona virus is still uncertain, there appears to be considerably more downside risk than any upside potential, so why not play it safe and go 'risk off'? For the past two weeks I had been wondering if the bull market was going to completely ignore the corona virus outbreak, but it turns out that it had already run off a cliff and was just taking a while to notice -- a bit like Wile E Coyote in a road runner caroon!

I had managed to shift our ~$1.5MM SMSF investment in the Vanguard 'high growth' index fund to a mixture of the Bond index fund and the Conservative index fund (having to mail in a signed paper switching form meant that it took several days to implement the decision I made on 6 Feb), and I also liquidated my $250K investment in the Colonial First State (CFS) geared share fund and my $100K investment in ETFs and used the proceeds to pay down most of my 'portfolio loan' (that had been used to fund the ETF purchases early in 2019, and my $100K deposit and $42K stamp duty for the investment unit purchase at the end of last year). I'll now be able to fund a large part of the 'settlement' for the investment unit using my 'portfolio loan' when construction is finished in 2023, and will only have to take out a relatively modest mortgage (around 50% LVR).

I had also intended to sell off my ~$50K investment in the CFS and ~$100K Vanguard International Index Fund and High Growth Fund investment but as these were 'collateral' for a couple of my margin loan accounts it turned out that I also needed to mail/upload redemption forms for those requests (the phone/online redemption requests I made on 6 Feb weren't actioned). As the market is currently already down by about 5% from the recent highs, I've decided I'll now just leave these investments 'as is' and avoid the headache of having to do additional capital gains tax calculations when I do this year's tax return. In any event, having paid off my margin loan balances there at least isn't any risk of getting margin calls and being forced to sell out of these positions at an unfavourable time (at least I learned something from the GFC!).

For the next 6-12 months I'll be keeping an eye on how severely COVID-19 affects the global and Australian economies, and the next decision will be trying to pick a suitable time to shift our SMSF investments back towards a 'growth' weighting, and when/if to utilize my available margin loan facilities to make geared investments in the stock markets. These things typically seem to take at least six months to 'wash through', but it could be a lot longer if the impact turns out to be a global recession (and possibly Australia could finally break its record run of economic growth and enter its first recession of the 21st Century).

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COVID-19 figures - bad globally, dodgy in China

Well, the official WHO SITREP figures are looking a bit dodgy, especially in relation to China. There was a period of optimism when the rate of spread in China seemed to be slowly substantially, only to see a 'one off' jump in reported cases when China decided to include cases detected 'diagnostically' (via x-rays etc.) rather than only reporting clinical cases (confirmed by lab tests). A few days later China reversed track and decided to again only report clinically confirmed cases. Personally I think the data shows that China was simply unable to keep up with the volumes of lab testing required, so for a week long period had been under-reporting new cases, and then added in the 'one off' diagnostic figures in an attempt to correct the data. The plot of calculated fatality rate (using current day, T-1, T-2, T-3 and T-4 calculations) clearly shows that the death rate had been climbing during the week that low numbers of new cases were being reported by China - indicating that the number of new cases was under-reported (hence pushing up the fatality rate). The 'one off' inclusion of diagnostic case numbers brought the fatility rate back down to the previously calculated percentage. And the recent 'low' daily increases has again seen the calculated fatality rate increasing to above 3%. This again suggests that the 'clinically reported' numbers for new cases is too low, and may be due to lab capacity being stretched, rather than an actual decline in the rate of spread.

Fatality rate (deaths/reported cases) using Current Day (T0), previous Day (T-1), etc as the denominator (rationale being that there is a lag of several days between a case being reported and average time of death in those cases that result in death):

Plot of my initial projection of spread of COVID-19 and 'actual' (reported) cases. Shows the uncertainty in cases numbers, due to changes in how China was reporting COVID-19 cases (clinical only, then including 'diagnostic' cases, then back to only including those confirmed by lab tests...). The trend in deaths seems to suggests that the number of reported cases is too low (as it is unlikely that the disease is getting more lethal):

Globally the rate of spread still appears to be exponentially increasing, but starting from a low number of initial cases, and has not yet shown any signs of being brought under control. The next month or so will show whether or not this outbreak will be contained globally, or if a true pandemic will evolve.

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Covid-19 (1999 nCov) cases outside of China

While the rate of increase in confirmed Covid-19* cases in China appears to have been reduced from exponential to linear (assuming you can rely on Chinese 'official' data sources - but their track record on accurately reporting bad economic data might suggest otherwise), the rate of confirmed cases outside of China still appears to be increasing exponential, its just much lower as it started from a much smaller initial figure.

The international cases are currently at a similar level as was present in China as at SITREP#3, so unless there is much better containment achieved internationally than was the case in China, we could see 40,000 cases outside of China within three weeks. Fingers crossed that doesn't eventuate.

*Apparently Covid-19 is now the 'official' name for 1999 nCov, as adopted by the UN. I wonder how many committee man-hours went into deciding that?

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