KW Insights | Our Coronavirus / Investment Update
In recent weeks, global investment markets have largely taking the coronavirus in its stride, with equity markets continuing to hover around record highs, taking the view that the event was unlikely to derail the outlook for global growth in 2020.
In the short-term, China’s economy is likely to take a severe hit as fears and travel restrictions weigh heavily on consumer activity and supply chains for global businesses are disrupted. Rough estimates suggest that 30% of China’s population and 50% of its GDP is under lockdown. In the weeks that have followed, the number of cases in China has risen exponentially as expected but crucially it has started to recede as the containment measures taken by the authorities appear to have worked. There are some questions around the validity of the numbers coming out of China, but workers are reported to be returning to factories and production lines in increasing numbers.
Over the last few days, markets have been spooked by a string of countries outside China reporting new outbreaks of the coronavirus. Whilst this number will inevitably rise and possibly significantly so from here, the mortality rate from the coronavirus is low. As the chart below shows, the case numbers are small outside China.
Australia’s Outlook
For Australia, we see the combination of the drag from the bushfires and coronavirus stalling the economy this quarter but growth should rebound in the June quarter as the rebuilding from the bushfires kicks in and if as we expect, the coronavirus outbreak is soon contained. There is a lot of uncertainty around all of this though, and it comes at a time when the economy was already weak. We will likely see continued rate cuts and increasing levels of government fiscal stimulus.
The broader vulnerability of the Australian economy should the outbreak drag on though is highlighted by the following chart which shows that Chinese tourists account for 0.2% ($2.8b) of Australia’s GDP, Chinese students account for 0.6% ($8.4b) and commodity exports to China account for nearly 4.8% ($67.2b), all of which are well up from where they were at the time of the SARS outbreak back in 2003.
How Should I be Investing?
Against this backdrop, short term reactive investment decisions may leave investors continuously chasing market moves, so focusing on the longer-term view is essential. In 2020, we can expect to see more sharp sell offs, followed quickly by big rebounds.
A cautious investment strategy is warranted in the near term until greater confidence is reached that the number of new cases has peaked and that economic activity will rebound.
If the virus fails to plateau within the next two months, prompting Chinese authorities to extend the lockdown to the point that factories exhaust inventories, impacting complex global supply chains, the growth outlook – for both China and globally - deteriorates meaningfully.
For more information on current advice and strategies in the current market conditions, please contact the Partner of King & Whittle Wealth Management Bruce Dyason.
Bruce Dyason, Partner King & Whittle Wealth Management: bruce.dyason@kingandwhittle.com.au, 03 9602 4466.