No one could have foreseen how the world would start 2020. On 31 December 2019 a new type of coronavirus, now known as COVID-19, was discovered in Wuhan, China, and since then the outbreak has had a significant impact on the global investment market.
The virus is spreading across Asia with a large number of cases in South Korea, along with Japan, Singapore, Hong Kong, Thailand and Malaysia. There are more than 1,100 cases in Italy, as well as other countries in Europe, the Middle East and North America.
Efforts by the Chinese Government to contain the spread of the virus have caused the country’s economic growth to slow abruptly, and we are now seeing global repercussions.
When the Chinese government locked down Wuhan on 23 January it was only the beginning of the country’s containment measures. Hundreds of millions of workers were restricted from movement, essentially housebound and unable to return to work after the Lunar New Year holidays.
Understandably, these measures were aimed at containing the spread of the virus, but the impact on the Chinese economy will be significant. Factories across the country have remained closed and the knock-on effect has reverberated around the region.
For example, in the industrial hub of Hubei Province, there are both Japanese and European car manufacturing plants, along with many electronics and industrial equipment factories. Global supply chains throughout Asia have been affected and regional businesses that rely on Chinese employees are impacted as their staff are unable to leave China and return to work.
Supply chains are affected and the economic flow-on to China’s trade partners will reduce growth forecasts.
Here in Australia, as China’s biggest trade partner, we are already feeling the effects in both the tourism and the education sectors as the government imposed a strict travel ban on Chinese visitors. The total economic fallout here is still uncertain but as China is one of the biggest consumers of many of our exports, it’s believed our economy will dip in the first quarter before rebounding if the virus is contained.
While COVID-19 continues to spread in mainland China, the speed of transmission appears to be slowing. There is an indication that some factories and businesses are starting to return to work, but there is still a long way to go before normal trade resumes.
Chinese stimulus measures
Already there have been stimulus measures from the People’s Bank of China.
In early February the bank injected billions of liquidity via reverse repurchase agreements and regulators and local governments recommended that financial institutions ease lending policies to many virus-affected regions.
Whilst there are some fiscal constraints that will influence future stimulus policy decisions, China is focused on supporting the already significant transformation of its economy. It has been effectively transitioning from the former economy (a credit fuelled infrastructure development and support for inefficient state-owned enterprises economy), towards a more sustainably expanding consumption and private enterprise economy.
They will not want to derail that program but face a balance between keeping the national deficit down and boosting economic stimulus. This balance will be tightly controlled and closely monitored.
Initial estimates indicate that China’s first quarter GDP growth will be significantly reduced, but more recently there is an expectation that global economic activity will continue to feel the effects well into the second quarter.
In uncertain times it pays to remain focused on the long-term
Everyone must concede that currently, the future progression of this virus and the impact on the Chinese and Global economy are still unclear. With uncertainty comes volatility like we have seen this week.
Until some clarity is achieved, this volatility is likely to continue as traders scurry to attempt to price in this risk.
As we have seen with other events like this, there is equal (probably greater) chance that risk and fear may abate (either some successes in containment achieved or progression towards a vaccine), in which case markets will rebound and those who sold investments in fear will be left behind. The truth is by trading this event we are speculating how it will resolve and we are investors not speculators. We know trading these events is fraught with difficulty and generally counter-productive.
The First Financial investment philosophy manages risk by avoiding forced selling when events like this occur. This, together with sensible fundamental research remains the best way to manage risks of this nature. We also know that despite a difficult week, equity markets are simply back at levels of a few months ago, yet we have enjoyed bull market returns for many years. Finally, and importantly, there is no real indication of portfolio income (dividends and rents for example) reducing – so a decision to move into defensive assets is a decision which will result in the reduction of income produced by a portfolio.
It’s in times like these that having a trusted adviser is important. Lean on them for advice and assurance; they have access to sensible information and can sort through the noise. We are not underplaying the potential significance of the COVID-19 coronavirus, but we are certainly not making rash decisions, and if history is any guide, these events are often overplayed. We will continue to watch every development. Our team is always available to discuss your portfolio performance with you. Contact us today if you’d like more information.