WEEKLY E-MAIL

13 March 2020

GLOBAL MARKETS UPDATE

By James Malliaros

Global financial markets are in disarray, with equities experiencing panic selling and bonds panic buying. The oil price war erupting between Saudi Arabia and Russia adds another layer of confusion to the coronavirus anxiety that was testing the resolve of investors.

The key questions on everyone’s minds are how long before business resumes as usual and how sustained will the impact of COVID-19 be on the global economy? These are not easy questions to answer. They depend on how long the news flow will remain negative, whether central banks and governments can create calm and offer a reasonable way out of the downtrend.

Earlier in the year, it was clear that the outbreak was serious and would cause a slowdown in the global economy in the first half of 2020. However, the market has reacted to the rising number of new COVID-19 cases outside of China. Central banks have been swift to respond, and fiscal support has arrived, but markets are now in the most severe correction we have seen since the GFC.

Markets are worried that while the coronavirus outbreak appears to have stabilised in China, the fear is that it may wreak havoc in other major centres of global economic activity. The uncertainty stems from the fact the coronavirus remains distinct from the pattern of influenza outbreaks that have afflicted the world.

The worst-case scenario is a global recession. Many commentators are forecasting 96,000,000 infections and up to 500,000 deaths in the US. While this is a possibility, it is not inevitable. Human behaviour has been adapting since the virus breakout. Cases in China have fallen by a factor of 30 in the last month. Countries such as Hong Kong and Singapore have been able to stop the spread quickly in its tracks with careful management.

Overall, research house Morningstar see a hit of 1.5% to 2020 global GDP and 0.2% to long-run global GDP. They have forecast a muted long-term impact because damage to productive capacity should be small, plus economic confidence should quickly return once the virus subsides. Morningstar believes equity valuations on average should be unscathed if their long-term projections on GDP are correct.

Morningstar’s long-term China GDP forecast is unchanged. They have lowered their 2020 China GDP forecast by 2.5%, but expect catch-up growth in following years.

Morningstar also sees reason for optimism surrounding vaccines and treatments. Initial data from Gilead’s remdesivir should be seen by April. Remdesivir is an off-the-shelf drug (studied in Ebola), which made this fast to clinical trials. The drug worked in a variety of animal models for other coronaviruses.

Remdesivir could be a strong defence for patients with severe disease. In their base case, they see treatments like Gilead’s remdesivir becoming available before a potential second wave in the US in their autumn, which should alleviate capacity constraints at hospitals. If this does become a moderate to severe annual threat, Morningstar assumes vaccines will be available by the 2021-22 US virus season.

Markets have been in this situation previously. When the financial system is subjected to a shock like the current one, we don’t believe that it is wise to make rash decisions. While you may think that share markets will keep falling, Government intervention and case counts getting under control could cause a rally in the opposite direction as the fear subsides.

While the virus will pass, lower interest rates could be with us for a long time. The problem of generating yield in a world of zero or negative interest rates is going to be an immense problem on the other side of this crisis.

In the process of portfolio construction, you have a well-considered strategy designed to meet your longer-term goals and objectives. During times of panic in financial markets, our firm belief is that investors should “stay the course” and stick with their longer-term strategy.

In the short term, confusion and fear feed into uncertainty, which usually triggers selling, which triggers more disorder and anxiety, and thus more selling.

We know that staying the course is challenging. It does not result in immunity against the fluctuations in the value of your portfolio. But abandoning a long-term plan can be even more detrimental. Staying the course is what keeps you in a position to benefit when a challenging period passes.

We will continue to communicate with you as often as necessary, so we provide you with the most up to date thinking.

James Malliaros
Senior Financial Planner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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