After a very strong start to the year in January, volatility in global share and bond markets increased dramatically in February as the scope and scale of the recent coronavirus (COVID-19) outbreak escalated. In the last week of February alone, major share markets fell by more than 10%. In this update we briefly examine the potential economic impacts of the outbreak and evaluate the implications for financial markets.
At the end of February the World Health Organisation (WHO) reported that there were more than 79,000 confirmed cases of COVID-19 within China, compared to less than 10,000 at the end of January. More than 80% of cases in China have been observed in Hubei province, where the virus is thought to have originated, and there was initially optimism that the measures taken by Chinese authorities would contain most of the disruption to this region only. Unfortunately this did not occur, and investors are now contemplating a more serious impact to the wider Chinese economy, as well as other key markets.
Markets experienced some volatility in January, but Chinese share markets were the most affected, and in key developed markets such as the US and Europe we saw a much more muted response. This was consistent with the expectations at the time that economic growth in China would likely be disrupted for several months before returning to normal. However, in the last week of February we have seen investor anxiety intensify as the virus has spread further both within China and abroad, resulting in an increased possibility of a more serious disruption to other key global markets. Australian shares fell 9.5% in the final week of February, while US and European shares fell 11.4% and 12.4% respectively in local currency terms.
These share market falls are understandably concerning for investors, but as the chart below illustrates, when considered over the longer term the returns from shares have been very strong, despite the recent correction. Even after the falls in late February the Australian and US share markets are still as high as they were as recently as the third quarter of 2019. In fact, at the end of February the Australian share market (as measured by the S&P/ASX 200 Accumulation Index) is up 19.6% since the start of 2019, while the US market (as measured by the S&P 500 Index) is up 17.8% over the same period.
At this stage it is still too early to know how the virus will progress and how deep its impact on the global economy will be. Possibilities range from only a mild, transitory effect on China’s growth, to more severe scenarios where not only China and its key trading partners are affected, but also other developed markets such as the US are seriously disrupted. Australia is particularly vulnerable given its considerable exports of goods and services to China, however the economy as well as financial markets may also be supported with the RBA cutting interest rates further to 0.50%. This is true in other key markets, where governments, and central banks are prepared to act to boost local economies should the impact of the virus get worse.
Market turbulence can cause concern and stress amongst investors, and as markets change rapidly it can be tempting to hastily make changes to one’s investment strategy. Remember that selling after the market falls just locks in those losses, so it is better to consider your long term goals before making adjustments to your investments. At EISS Super we maintain our diversified approach to investing to limit the downside risks and stick to the long term investment strategy that has provided steady returns for our members. Given the situation is evolving fairly rapidly, we will continue to monitor markets and maintain our focus on protecting your capital whilst also providing strong long term returns.
If you have any questions, or for more information, please call us on 1300 369 901, Monday to Friday from 8am to 8pm (AEST).
1 Bloomberg Finance L.P, EISS Super. Past performance should not be regarded as an indication of future performance
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