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Venice cut short its Carnival; Beijing postponed its annual legislative session in mid-March and cases of the Coronavirus in South Korea soared, with companies like Samsung temporarily closing factories. Some strategists are beginning to reassess their view that the impact of the deadly outbreak would be contained to the first quarter—now warning that markets may be too complacent.

The World Health Organization on Monday said the COVID-19 outbreak isn’t a pandemic because it is not spreading in an uncontained way. Still, the spread of the virus to more countries, including South Korea—an export hub from components and chips that go into the world’s gadgets—rattled investors trying to assess the economic damage. The S&P 500 fell 2.6% to 3249 and the Dow Jones Industrial Average tumbled nearly 800 points to 28193.75.

Influenza has killed more people than the coronavirus, but the uncertainty around this virus has caused companies and countries to take much more extreme measures that are rippling through the economy.

Italian officials shut down schools and museums and banned public and private gatherings in the northern part of the country as Italy became the site of the world’s third biggest national outbreak of the deadly virus after South Korea and China. Roughly 24 million people and Italy’s industrial hubs around Milan, Turin and Venice are under restrictions so far. Expectations for a pickup in South Korea’s recovery have been upended and Xi Jinping said Sunday “prevention and control work is in the most difficult and critical stage” amid concerns the outbreak could accelerate as Beijing begins to lift travel restrictions.

That is causing some reassessment among strategists who have largely expected a short-term hit from the virus with a sharp rebound once companies try to recoup some of the lost demand and central bankers offer stimulus, but there is growing uncertainty around the shape of any possible recovery.

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BlackRock Investment Institute’s strategists wrote in a note that they maintained their moderate tactical overweight to quality stocks but were reviewing their overall “risk orientation and tactical views,” citing the coronavirus outbreak.

Gavekal Resarch’s Andrew Batson warned the risk was far from priced, warning that the economic damage from the coronavirus closures will be more prolonged than the market currently hopes, and that the policy response from authorities is less forceful than market expectations. Even as roughly half of major industrial companies in areas like Guangdong, Jiangsu and Shanghai had reopened, few were back at full strength and the world’s second largest economy still looks to be operating at less than half of normal capacity, Batson wrote.

In an informal survey of clients about the virus, DataTrek Research found that more than a third had already shifted portfolios. The recent volatility may push the other two-thirds to take similar moves—and that could mean more pressure on markets, wrote DataTrek co-founder Nicholas Colas in a note on Monday.

As for when China’s economy could bounce back from the hit, Colas found little consensus among respondents, adding that it may be more of a 2021 event rather than a late 2020 one.

In a note to clients, Goldman Sachs strategist David Kostin wrote that most corporate managements in quarterly calls anticipated only a temporary impact from the outbreak and optimism about a continued economic expansion. But companies with high China sales had underperformed the MSCI China by 5 percentage points since Wuhan implemented travel restrictions on Jan. 23.

Also concerning: The correlation between the 10-year U.S. Treasury yield and the S&P 500 Index sits at a four-year high, wrote Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, in a note to clients. “We see stock prices as vulnerable, so if interest rates were to back up suddenly, the diversification that bonds usually provide could fail,” she writes.

So what should investors do to better prepare their portfolios?

Shalett’s recommendation to clients: Consider lightening up on secular growth stocks that have done well and adding to undervalued cyclical stocks in areas like financials, industrials, energy and commodities.

Almost three-quarters of those who responded to Colas’ survey said technology, discretionary or energy were the most vulnerable. Not only does the discretionary sector have sizable China exposure, with McDonald’s (MCD), Nike (NKE) and Starbucks (SBUX) accounting for more than 15% of that sector. Also a possible issue: Amazon (AMZN), which accounts for more than a quarter of the sector, is trading at 72 times forward earnings, Colas notes.

As a result, the playbook for investors to dial down risk includes selling technology, discretionary and energy and buying staples and health care, Colas says. Though communication services fared relatively well in its survey of clients, Colas says it is too overweight high-valuation stocks like Alphabet (GOOGL) and Facebook (FB) to offer a haven for investors. And an inverted yield curve could hold financials back.

Past global health related concerns led to short-term market corrections averaging 8%, writes Citi Private Bank’s Chief Investment Officer Steven Wieting. Instead of piling into expensive defensives—like U.S. Treasury bonds and utility stocks—he recommends using shorter-term hedging strategies instead.

The good news? Only a quarter of those surveyed by DataTrek see the virus triggering a global recession. “That should be enough to limit stocks’ reaction to a pullback rather than a full-on rout,” Colas writes.

Let’s hope he’s right.

Write to Reshma Kapadia at reshma.kapadia@barrons.com