Monthly Perspective | February 2020

Another good month for returns as central banks remain accommodative and investors shrug off the impact of the novel coronavirus (COVID-19). This month, we take a look at the potential impact of COVID-19.

The rally continues in both stocks and bonds as accommodative central banks continue to outweigh the headwinds from the novel coronavirus or COVID-19 as it has officially been named.

Over the past four weeks, the S&P/ASX 200 rose 2.8% though it wasn’t smooth sailing as it nearly gave back all its gains at the start of February on the coronavirus fears. The U.S. S&P 500 rose 2.2% and the Euro Stoxx 50 was up 2%. On the other hand, Asian markets took a heavy hit as China’s CSI 300 fell 5.8%.

Commodities were hit hard as concerns over a prolonged shutdown of factories in China would hurt demand for industrial resources. Oil, iron ore and copper all fell by about 10% over the past four weeks.

Safe haven bonds provided strong returns as U.S. and European 10-year government yields fell over 0.2% whilst Australia’s fell 0.17% to a 1.04% yield.

The Australian Dollar fell as the U.S. dollar strengthened on safe haven demand and is now trading around 67 cents.

Economic overview

There is a new topic filling up headlines and knocking trade tensions off its perch. The novel coronavirus, COVID-19, will likely continue to be front and centre for the media for a while longer but its long-term implications have generally been played down with the consensus view that there will be a sharp rebound once the virus has been contained.

Domestic inflation remains below target despite last year’s cuts, though it came in slightly higher than expected at 1.8%. With the bushfires and COVID-19 hitting tourism and retail, both of which are big sectors domestically, it is likely that Australia’s economy will remain weak over the next few months.

Manufacturing and services activity in the U.S. showed early signs of a rebound, though this data was before the advent of COVID-19. Employment figures were also much stronger than expected but the unemployment rate fell to 3.6% as the participation rate rose, an encouraging sign. However, the caveat here is a big downward revision to the strong figures of previous months.

Similarly, China’s economic data pointed to a continued rebound in activity prior to COVID-19. Both imports and exports were better than expected, and industrial production grew 6.9% versus the 5.9% consensus estimate. To combat the impact of COVID-19, the Chinese government has introduced a wave of stimulus such as special loans for affected businesses.

Unlike the U.S. and Chinese data, European data was less encouraging. Although manufacturing and services activity indicators beat expectations, manufacturing continues to indicate contraction and industrial production fell more than expected.

Off the headlines, the global earnings season is well underway and has so far been encouraging. Domestically, earnings season is just kicking into gear but has been fairly mixed so far as the bushfires and COVID-19 hurt the near-term outlook for many businesses.

COVID-19 economic implications

It is difficult to quantify the magnitude of slowdown in the global economy from the outbreak as it remains to be seen how far the virus spreads, how long until it is contained and how long an effective treatment is developed. In China, the economy remained shut for an extra week post the Lunar New Year celebrations. Even after re-opening, many reports suggest the resumption is largely symbolic, with estimates putting businesses running at only 10-20% capacity.

As it stands, economists are putting out a wide range of downgrades to global economic growth, with the first quarter expected to see a significant slowdown followed by a sharp rebound, resulting in only a minor downgrade of global growth for the whole year. However, the risk to this is the potential for a second wave of infections which could stem from the return to work in China, or from a spreading of the virus overseas. Given the symptoms for less severe cases are similar to the flu, there is a chance that some cases are misdiagnosed or unidentified which could lead to the source of a second wave.

These forecasts may also be inaccurate because most use precedents such as the SARS outbreak as a basis for their assumptions which may no longer be relevant given that China is much more integrated with the global economy than it was 17 years ago, and the Chinese economy has progressed from cheap production to unique or higher quality production which may not be so readily replaceable or substituted. Many of these products are now protected by patents or other intellectual and technological property for which China may be the only production source.

At this stage, markets have largely shrugged off these risks, with government stimulus and central bank accommodation providing a boost to sentiment and easing worries. Share prices of Chinese companies and other companies that have been directly impacted, such as those in the tourism, hospitality, retail and commodity segments, have sold off, however; other markets continue to march higher. Currently, there seems to be little reaction from those affected by second order effects. For example, many electronics producers source some specific components primarily or even exclusively from Chinese manufacturers, and China is the lowest cost supplier for many intermediary products. Yet, it remains to be seen if higher costs, and potentially lower production have been baked into current forecasts. Therefore, investors will need to be mindful of any indication of a second wave of infections or a prolonged disruption of Chinese manufacturing as these may start to impact other economies more heavily.

With that said, the sell-off in Asia has pushed equity valuations in the region back to long-term averages. Compared to other major markets that are currently trading well above long-term averages, this could prove to be a good opportunity to accumulate holdings in a region that is expected to be home to the fastest growing economies over the next decade.

 

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This month’s perspective highlights that market sentiment on all asset classes is constantly changing. It is important for us to quickly recognise any threats, to preserve your investment capital or to identify early investment opportunities to maximise any return advantages. At Partners Wealth Group we don’t get complacent with the current state of play and constantly monitor investments and your portfolios.

If this article has raised questions regarding your personal situation, please contact your Partners Wealth Group advisor directly or on 1800 333 143.

 

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information.