WEEKLY E-MAIL

2 March 2020

CORONAVIRUS:

AN UPDATE

By Patrick Malcolm

Markets have fallen over the last week as the Coronavirus continues to spread.

Despite the number of new cases of Coronavirus slowing in China, markets have become concerned by the spike in the number of cases being announced in other regions. As investors consider the potential flow-on effects of the Coronavirus on the global economy, many have taken a risk-off approach. As a result, global share markets have collectively declined.

While the nature of the Coronavirus continues to make forecasting difficult, one thing is sure: the level of uncertainty about the epidemic has impacted the level of volatility in markets. And according to economists, global growth is likely to be affected in a “meaningful” way.

• Some of the biggest concerns for markets at this time include risks surrounding declining growth impacts from the damage already done in China, the spread of the Coronavirus to other regions, as well as another potential wave of infection because of Chinese workers returning to work.
• Although the number of new daily Coronavirus cases has fallen due, in part, to China’s “unprecedented” lockdown and restrictions on its people and provinces, significant clusters of infection have begun impacting Italy, South Korea and Iran.
• The virus has not just had a meaningful impact on the level of activity in China. According to manufacturing data, the Coronavirus has also affected the United States. Some economists have begun to downgrade growth forecasts for the US over the first quarter, influenced mainly by the Coronavirus’s flow-on effects: decreasing tourism in the US, supply constraints impacting the retail sector, and the supply chain impacts on US manufacturing.
• In Italy, the government has quarantined 50,000 citizens across 10 towns in the wealthy regions of Lombardy and Veneto. The epidemic threatens to stall the government’s plans to restart the economy with new tax reforms and investments, as it instead turns its attention to containing the Coronavirus and mitigating the impacts on businesses affected by these measures. As Europe’s favoured destination for Chinese tourists, any prolonged disruptions to these areas (which contribute roughly a third of the Italian economy) could have a significant impact on the economy, which is already nearing a recession.
• It is also anticipated that there could be continued pressure on travel and tourism-related stocks worldwide.

Nonetheless, expectations are that the worst of the impacts may be contained within China and that global activity could rebound over the rest of the year as markets recover, the number of new daily Coronavirus cases slows, and as restrictions are slowly lifted across China – spurring the world’s “factory” back into action.

After a strong year for returns in 2019 – particularly following a phase one trade agreement between the US and China after a prolonged period of uncertainty – markets have taken a hit.

Looking ahead, there could be more volatility for equities as adjustments are made to supply chains to mitigate disruption, and as macroeconomic influences on markets take time to stabilise. However, as the number of new cases falls over time, as governments work to slow the spread of the virus, and as restrictions are slowly lifted in China, confidence should gradually return to share markets.

In a big picture sense, the fall in share markets should be seen as a correction after markets ran hard and fast into record highs this year from their last decent correction in August last year.

Significant volatility is a feature of being invested in the share market. Periodic falls are inevitable and hard to time, so we believe it is best to take a long-term approach when invested in a well-diversified portfolio.

Patrick Malcolm
Senior Partner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 278061

If you have any questions or comments, please email me at patrick@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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