Firstly, we wish for you and your families to remain safe and healthy as the Covid-19 (Coronavirus) runs it course. What began in December 2019 with a handful of mysterious illnesses in the central Chinese mega-city of Wuhan has travelled to other parts of the world, jumping from animals to humans and infecting close to 90,000 people to date. It has triggered unprecedented quarantines in China and a string of countries have now closed borders with Italy and Iran (including Australia) given the spread of the virus there. South Korea has delayed the start of its school year amid a spike in cases, and there is a possibility that the Olympics in Japan will not proceed as planned. This is effecting global supply chains and is causing fear in investment markets in the short term.
Most cases of the virus are mild, but health officials say its spread around the globe may be inevitable. From a non-financial point of view, it appears that frequent and proper washing our hands with soap is one of the simple things we can all do to reduce the chances of contracting or communicating the illness.
In addition to the life threatening public health crisis, Coronavirus is also posing an economic and market threat. Globally and in Australia, we have experienced a sell-off in investment markets in excess of 10% (technically known as a ‘correction’) as investors react to the growing numbers of Coronavirus outbreaks.
First quarter GDP could be negative, both in Australia and globally
March 2020 quarter Gross Domestic Product (GDP) growth is likely to be negative, possibly leading to a stalling or even decline in the global economy. However, it should prove short lived.
With many Chinese staying at home as confirmed by various indicators around transport congestion, coal consumption and property sales, the hit to Chinese growth and the flow on to the global growth will be big this quarter. It’s possible that global growth will be zero in the March quarter or may even contract. Rough estimates suggest that 30% of China’s population and 50% of its GDP is under lock-down and each week this remains the case will knock 1% off Chinese annual GDP and nearly 0.2% directly off global GDP. However, if the outbreak is contained in the next month or so as we expect then growth will bounce back in the June quarter and share markets will largely look through it, albeit with the high risk of further short term volatility.
For Australia, we see the combination of the drag from the bushfires and coronavirus detracting around 0.6% from 2020 March quarter GDP which will see the economy go backwards by around -0.1%. However, growth is expected to rebound in the June quarter as the rebuilding from the bushfires kicks in and if as we expect the Covid-19 outbreak is soon contained. There is a lot of uncertainty around all of this though and its come at a time that the economy was already weak with high levels of spare capacity leaving the Reserve bank of Australia (RBA) a long way from meeting its growth and inflation objectives, so we continue to see further interest rate cuts (monetary easing) from the RBA in the months ahead and a stepped up fiscal stimulus (tax cuts) in the 2020 May budget.
Please rest assured that Fintech Financial Services is reviewing the situation closely with our specialist investment managers to ensure your long term portfolio objectives are maintained. Times of concern and crisis requires rational thinking and a disciplined approach to stay on track – not only to address any short term impacts – but to take advantage of the long term opportunities that unfold as investment markets react with fear and panic. We will keep you up to date as the situation evolves. For now, stay calm and don’t let the barrage of news and media updates about the Coronavirus cause you too much concern.
The sensible long term view
In six months’ time, we believe that we will be looking back at the coronavirus, mourning its victims and at the same time marvelling at the resilience of markets. History may be no judge of future performance but in this case it is a reminder of how past outbreaks have left a shallow impression on markets.
From the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003 to the twin strikes of Ebola in 2014 and 2016, and a bout of Zika in between, disease has made headlines and jostled markets. However, each time the outbreaks and the financial losses were eventually contained. “Market participants tend to react to such unforeseen outbreaks,” says Morningstar Investment Management’s Carolyn Szaflik, “but markets tend to recover by the six-month mark. This suggests that sentiment drives early losses, but sustained economic impacts are likely to be less than investors fear at the onset.”
How markets have reacted to previous outbreaks
From SARS to Ebola: market immunity
Since 1998 there have been nine global epidemics but little evidence linking them to long-term fundamentals. For investors, that means avoiding the hysteria and focusing on the factors that make businesses worth investing in.
Exhibit 1: Investors tend to react to epidemics, but the long-term picture is positive
A key consideration for the moment is the potential effect of coronavirus on the cash flows of affected businesses. Empty streets in China, fewer flights, fewer customers, less turnover, and crucially, a hit to global supply chains will cause a drop in the output for the world’s largest economy (China). The damage will emerge in future earnings reports.
Exhibit 2: Market reaction to global epidemics
That said, “it’s not necessarily a trigger to dump stocks, crystallise losses and seek refuge in cash,” says Szaflik. Share prices may have dropped but China is on the case. Its stimulus measures have curbed the losses and the country’s central bank is set to lower the lending rate and relax rules around how much money banks have to keep in reserve.
So what to do?
Economist John Maynard Keynes said it best in the following quote “When the facts change, I change my mind. What do you do, sir?” It’s a bit like that now. Watch and wait. If we were to see a clear and significant potential impact to investment fundamentals, we will carefully study the situation, conduct rigorous scenario analysis, and incorporate the new information into our portfolios. We certainly won’t be hitting the panic button and recommend that you don’t either.
In summary, a cautious approach is warranted in the near term until greater confidence is reached that the number of new cases of Coronavirus has peaked, seeing economic activity rebounding again. Fintech Financial Services is committed to utilising the market leading research providers and investment managers in the market to not only mitigate risk in your portfolios, but look for opportunities to position for the eventual rebound in hard hit emerging markets and Chinese shares, commodities, resources and travel stocks. Buying opportunities are also presenting themselves in the more resilient US, European and Australian share markets.
Stay calm and we will keep you up to date with how things are progressing.