Markets, News, and Views….. 

The coronavirus appears to have finally spread to the financial markets.   

In an economic update to us just last week on 17th February our research consultants, Quilla, noted “but the final impact will be unclear until we can see when the spread of the virus has peaked and how far it will have reached at that point.   It seems at this point that the virus is worse than has been reported so far, with virologists at Imperial College London estimating that only 10% of cases have been reported and there are in fact up to 50,000 new cases a day in China.  This virus is worse than SARS and markets do not know what to make of it all yet.  Volatility has been fairly benign to date so if the infection rates or mortality figures take a turn for the worse the markets could react badly, in the short term at least.”

And overnight the financial market did indeed react.  With China shutting down many cities and ports the impact on global supply chains is more apparent, and the spread of the infection to Europe via Italy and greater outbreaks in manufacturing and exporting hubs like South Korea and Japan has ratcheted up the uncertainty.     And despite the fact that, at around 3% of total infections the mortality rate is still considered low, it is the uncertainty that will cause initial reactions as usual.

So how will financial markets react in the short term now?  Up until now active share managers were still finding good quality stocks to buy at the right price – it remains to be seen whether the market reaction is sustained or is seen as over-reactive and at what point will the buyers take advantage.    

2020 had otherwise been kind to investors.   Here in Australia, we had the extra difficulties from the terrible bushfires. Despite all this, our local Australian share market had a great January, building on a very strong 2019 and outperforming global counterparts.  February (until now) had continued just as strongly. The weaker $A and stronger performance from bonds helped our equity market, though more so in the non-resource sectors.

The bushfire season has wreaked terrible damage, notably on the Eastern Seaboard. At this stage it is hard to gauge the impact on the economy. On the one hand, there is the immediate destruction of property and infrastructure, plus a hit to consumption and tourism. On the other hand, there will be positive effects flowing from government funding and the reconstruction program. The short-term impact on growth will be negative, with offsetting positive effects coming later.

On balance, economists have downgraded growth forecasts for the first half of 2020 by around 0.3% – 0.5% reflecting both the bushfires and the impact of coronavirus on demand from China, including tourism.

The price of oil fell sharply on global growth fears associated with the coronavirus while the price of gold rose. The world economy continued to stabilise after the weaker tone through much of last year, especially in manufacturing. However, it is still not clear that stabilisation will soon be followed by a meaningful recovery.

In the UK, three and a half years after the initial referendum, Parliament finally passed the legislation to enable Britain’s exit from the EU.

And in the US, the Democrat-controlled House of Representatives voted to impeach President Trump, but, amid much acrimony, the Republican-controlled Senate almost immediately exonerated him. Preparations continued for the Democrat primary race to choose a Presidential candidate. Bernie Sanders appears to be the main contender at this stage, with Michael Bloomberg yet to show his hand.  The general consensus is that most of the Democratic nominees just don’t have the support base or the firepower to beat Donald Trump.   The chart shows how investor sentiment has shifted since April 2019.

Sources: Thomson Reuters, Bloomberg, Quilla Consulting, T Rowe Price.