News that the Coronavirus (Covid-19) is spreading outside of China, has caused investors to hit the panic sell button. With Covid-19 not yet contained, the economic damage continues to spread from China and across multi-national companies in the airline, hotel, cruise, casino, entertainment and logistics sectors.

Ripple effects are likely to be felt across all global sectors and as a result, BCA Research estimates that global growth is likely to be cut in half during the first quarter from 3.3% to 1.7%. As a result, we expect many companies to miss first-quarter earnings.

In three of the last five viruses, markets corrected as negative headlines dominated investors’ attention. However, in 2003 during SARS, markets rallied as the economy was coming out of the 2002 recession. Likewise, during the swine flu in April 2009 when global stock markets bottomed in March 2009, the market rallied as it started discounting that a global recession was over. See Table 1. The average decline in the stock market indexes during Ebola, MERS and Zika is as follows; S&P 500 Index -4%, TSX Composite Index -4.7% and MSCI World Index ex. USA -6.7%. Given that Covid-19 has caused more deaths than SARS, we would expect markets to pull back more than average and would remind investors that annual stock market corrections in the range of 7-10% are normal.

Media attention on the virus plays an emotional role in the stock markets. News flow regarding a virus has typically peaked at an average of 46 days. Using January 20th as the start of the news flow, that means stories about the Covid-19 virus should peak around March 5th. However, it may go beyond that date due to the rising number of deaths.

Table 1

Source: Scotiabank GBM Portfolio Strategy, Bloomberg.

What Should Investors Do?

  • First, do not react based on new headlines or a market correction. 
  • Second, remember past viruses were buying opportunities for investors. Stock markets usually have a knee jerk reaction and then quickly re-adjust back to the fundamentals of corporate earnings and the stage of interest rate cycle. 
  • Third, investors should stick with their long-term asset mix rather than letting the headlines induce emotional decisions to reduce equity exposure. 
  • Fourth, we expect central banks to respond to any economic growth slowdown through further interest rate cuts and more quantitative easing in China, Europe and Japan. An accommodative interest rate policy should buoy stocks later this year as the virus becomes contained and investors start discounting weaker corporate earnings.

At Matco, we remain committed to our M-Factor Process focused on company investment characteristics and our investment strategies remain fully invested during this period. Our Global, Canadian and Small Cap Funds remain defensively focused on high dividend paying companies and have limited exposure to highly volatile commodity sectors such as energy and gold/silver.

To find out more about our M-Factor Process and key investment characteristics that we examine, please contact one of our Portfolio Managers at 1-877-539-5743.

Vice President, Portfolio Manager

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Founded in 2006 to manage and service seven family offices, today Matco offers the benefits of our extensive investment management experience to individual investors, foundations, endowments, condominium corporations, trusts, corporations and not-for-profit organizations.

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Matco Financial is an independent, privately held discretionary investment counsellor and asset management firm that serves the needs of individual investors, institutions, advisors, trusts, corporations and not-for-profit organizations. Matco provides investment advisory services to investors on a discretionary basis through mutual funds and separately managed accounts. This communication is intended for information purposes only and does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Matco Financial Inc. makes no representations as to the accuracy or any other aspect of information contained in other websites. All statements that look forward in time or include anything other than historical information are subject to risks and uncertainties and are not guarantees of future performance. Investors should not rely on forward-looking statements. Actual results, actions or events, could differ materially from those set forth in the forward-looking statements.

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