Share prices have moved up and down this week based on the changing daily view of how much havoc the coronavirus will create for the world economy. I think it's reasonable to assume that if Chinese factories are staying closed for longer over the Chinese New Year and that fewer people are travelling around China, then a reduction in Chinese GDP growth is very likely. This will probably be followed by a recovery when things get sorted out.
Elsewhere, there is talk of weakening economies with some commentators pointing to the inversion of the US yield curve, with the yield on the 10-year Treasury going below that of the three-month bill. In the past this has been a reasonable predictor of a forthcoming recession, but it doesn’t always work, as we saw last year.
We will get a recession at some time in the future, but I’ve no idea when it will be. As far as long-term equity investors are concerned, my views remain unchanged. You should own the shares of robust, high-quality companies that have a proven ability to weather good times and bad.
The key to very good long-term returns from a portfolio of shares is avoiding risks and big blow-ups. This largely comes from the amount of business risk that you take on. This is something that you can control by studying a company’s history and this is why I have always been a keen student of annual reports.
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