Coronavirus (COVID-19) AND THE GLOBAL MARKETS

Monday 2nd March
James Kelly

Market response. As at 1pm on Monday 2nd March, the ASX 200 (index of the 200 largest Australian stocks) has dropped 10.8% or 772 points over the last week. This has been the steepest drop since the global financial crisis and it’s likely there are more falls to come. Of note these falls have come off record high, with stocks now back to their August 2019 levels.

Cause. Coronavirus is clearly the cause, but looking inside this there are several reasons. The primary issue is people and markets don’t know what’s going to happen next, and above all markets hate uncertainty. There is a clear aspect of panic selling.

The world is very reliant on strong supply chains and a lot of this is based on ‘just in time’ (JIT) inventory systems. This concept was introduced by Toyota in the 1970s and has been globally adopted. JIT means companies reduce inventory costs by holding minimal stock, and raw materials arrive only as they are needed. China’s response to the virus has been to keep workers at home in quarantine, which has closed down factories and ports. It has taken a few weeks but all the ships and factories that should be delivering to US and European markets simply aren’t arriving. The negative effects of supply chain shock are now being felt.

China now appears to be getting a hold on the virus but it is spreading to more countries including Iran, Italy and South Korea. This has created another wave of panic.

The way ahead. SARS (severe acute respiratory syndrome) is being viewed as the most similar historical scenario, which commenced in November 2002 and ended in July 2003 with the World Health Organisation (WHO) lifting travel restrictions. Coronavirus has killed more people, however it is less lethal than SARS, with a lower percentage of people contracting the disease actually dying. The obvious answer to coronavirus is a vaccine (which prevents infection), but health experts say this will take at least 12 months. A large chunk of this time is human trials, which can take three to four months per trial. In the meantime medical authorities are focusing on existing drugs that will heal patients or alleviate symptoms.

The government and reserve bank are both watching developments, and have limited options for responding to the crisis. Unlike the GFC, where interest rates were at 7%, current rates are at 0.75% and there is not a lot of room for further drops. The RBA next meets on Tuesday 4th February to review rates and predictions are a cut is ‘likely’.

As always we cannot predict the future however the market has always recovered from previous incidents and gone onto new highs. The question is how big will the correction be, and how long will it last. Some people are querying the merit of selling out of growth investments now, and buying back when the market has reached the bottom. This strategy intuitively makes sense but in practice is very difficult to get right. This is especially relevant in the current situation where the drop is so steep, the bottom hard to pick and the recovery likely to be quick. While every persons situation is different we caution against exiting  the market now to avoid further falls.

Please contact us if you would like to discuss your situation. We will provide further reports as information comes to hand.

General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances.