CORONAVIRUS (COVID-19) AND THE GLOBAL MARKETS - UPdate

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Friday 6th March 2020
James Kelly

MARKET
This is our second update on the market’s response to the coronavirus. At close today the ASX 200 was at 6,236, down 2.5% for the day and 13% since the all time high on 20th February.

While comparisons are being made to the SARS (Severe Acute Respiratory Syndrome) virus from 2003, a major difference this time around is the size and dominance of China’s economy. Their economy is now eight times larger, and their GDP has gone from 4% to 16% of the global total. As a result the impact of a virus that started in China is being felt globally.

As mentioned in the last update the major tangible issue has been supply chain and travel disruption. Chinese factories aren’t producing, freight ships aren’t sailing, and people aren’t travelling for work or leisure. The intangible issue however is panic, which is being partly fed by media reporting. We have seen a rush on supermarkets for toilet paper and rice, and even $200 bottles of hand sanitiser.

GENERAL RESPONSE
The key response has been containment. This means people are staying home from work and travel is restricted or even banned. At some point we expect formal acknowledgement that the spread can’t be contained, and the focus will instead switch to management and treatment. As mentioned in the last update a vaccine is at least 12 months off.

The Reserve Bank of Australia has lowered interest rates from 0.75% to 0.50% in a bid to keep money flowing. The US Federal Reserve has made a similar move and reduced their rates to a range of 1 – 1.25%. At this stage these cuts have had little impact as the market is being driven more by panic than simple economics. It should also be noted that leading into the global financial crisis of 2008 interest rates were at 7%, meaning Central Banks had a lot more room to move.

The Australian government has also committed to a stimulus package of around $1bn. This includes extra hospital funding with further announcements to be made. The government has also announced deeming rates will be reduced, which impacts the amount of age pension paid to certain people and helps offset the low interest rates.

INVESTORS
Investors face several options in the face of this market correction, with articles variously recommending to buy, hold and sell (sometimes all in the same article!). We continue to caution against selling now on the hope of buying back when markets are lower. Trying to time the market is fraught with danger and near impossible. While markets can face periods of rapid decline, history has shown that they eventually recover and move on to reach new highs. Legendary investor Peter Lynch warns, “Far more money is lost by investors trying to anticipate corrections… than has been lost in corrections themselves”. Selling down after these losses have already been incurred could possibly lead to missing some of the best gains in the future.

It is also important to stay focused on what has been an exceptional time for investors since the GFC, and particularly over the past 12-months to the end of January 2020. Even a correction of 15% would mean equity markets have still delivered very healthy returns over the past year.

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


GENERAL ADVICE WARNING
Any advice in this email is of a general nature only and has not been tailored to your personal circumstances. Before acting on this advice, you should consider whether it is appropriate having regards to your personal objectives, financial situation and needs.