Coronavirus and the impacts on global markets

3 min read

What has happened to markets so far?

Markets have experienced bouts of significant volatility over the last three weeks as investors try to assess the impact of the Coronavirus (COVID-19) outbreak.

Occurring at a time when the outlook for global growth had been improving, with interest rates continuing to remain low providing accommodating financial conditions and helping equity markets reach record highs – markets began to react negatively through the second half of February. The size of these moves witnessed, particularly for equity markets, compares to periods experienced at the height of the 2008 Global Financial Crisis (GFC). Fixed Income and currency markets have also reacted, through falling yields, though much of the shift in sentiment was experienced across equity markets.

In response to the ongoing rise in new cases across regions and countries, governments have significantly increased their efforts to raise public awareness in an effort to address the spread of the virus. The majority of cases remain centred in China, however, the number of newly contracted cases has moved signifcantly higher outside of China.

Given the potential severity of the current outbreak being priced by markets, one perspective is to consider that the World Health Organisation (WHO) currently attributes between 300,000 and 650,000 deaths per annum from the annual influenza virus (with 3 to 5 million cases of severe illness) and the current mortality rate of COVID-19 appears to be no more significant from a humanitarian standpoint[1]. The fact that there is currently no known treatment available has increased the significance of this latest outbreak until such treatment exists.

What are the known economic impacts at present?

Factory closures across some manufacturing sectors (primarily in China) and travel-related bans now being imposed in other regions outside of China/Asia will certainly impact global economic activity, company supply chains and, in turn, company profits going forward.

Revenue for many companies may be impacted in the short term, particularly given the shorter inventory cycles that many now operate under (aka “Just in Time'” strategies). China reported weak economic activity just 20 days after their Chinese Lunar New Year, due to mainland quarantines and travel restrictions. Recent indications show that economic activity in China is improving slowly.

Global share markets have been a sea of red over the last few days as investors attempt to quantify fears over the coronavirus spread. US equity markets have suffered their largest falls since the GFC in volatile trading. As an example of the volatility being experienced in the markets, on the 10th March, the S&P 500 closed down ~7.6%, followed by a 4.3% rise the following day.

Furthermore, investor sentiment remains fragile, as reflected in the VIX index, which is regarded as a bellweather for market fear. The VIX index remains at levels not seen since 2009 when the world was still gripped by the GFC. The heightened level of the VIX index continues to highlight the anxiety in financial markets surrounding the impact of the coronavirus.

Pressure for further policy support from both Central Banks and Governments to spend has increased, and is yet to be fully reflected in equity markets following the reductions announced in February 2020.  

Current state of the Coronavirus epidemic

While infection rates now appear to be slowing in China, COVID-19 infections are on the rise outside of China. There have been fewer daily deaths and fewer new cases in the past several days in China. The WHO-China joint mission held a press conference earlier this week[2] noting their belief that the number of new COVID-19 cases in Wuhan (ground zero of the recent outbreak) has dropped since January 23, suggestive of the disease having now potentially peaked in China.

However, the clear concern for markets at present, is the rapid pace of outbreaks in other regions – see here for most recent confirmed cases of Coronavirus.

There does not appear to be an imminent medical solution yet, raising the concern of the outbreak having a more protracted impact on communities and economies. Though clinical trials are underway on experimental vaccines, it would likely be several weeks to months before a drug comes onto the market.

Implications for investors

As we consider the current market impacts of the COVID-19 induced volatility, we do not yet have a clear indication from information available of when or how the current outbreak may be contained. Equity markets have already priced in a significant adjustment down in growth and profit expectations, yet historically events such as these have seen markets experience a recovery over the subsequent next six months as a possible indicator or recovery timeline.

Additionally, the impacts of the latest outbreak have so far only impacted the global supply side, whilst the incoming 2020 economic environment and fundamental backdrop (low interest rates and inflation, fiscal stimulus in China, robust demand in the US and potential for increased fiscal stimulus across other regions) still remains a positive, and may yet be further supported should governments and policy makers look to pre-empt a global growth slowdown from here.

Whilst we admit our portfolios are not immune to periods of negative returns, they are by design diversified across asset classes, which provides investors some protection against falls in equity markets, like those experienced last week. We continue to hold our portfolio positions in line with our strategic targets and expect to continue rebalancing towards these targets throughout the current volatile period.

For long-term investors we advocate remaining invested. The current period of volatility could continue, however markets have discounted signficant underperformance with little consideration of any recovery in growth towards the end of this year.

If you would like to understand how your personal financial situation will be impacted you can speak to a financial adviser.

[1] https://www.who.int/news-room/fact-sheets/detail/influenza-(seasonal)
[2] https://www.who.int/docs/default-source/coronaviruse/transcripts/joint-mission-press-conference-script-english-final.pdf

 

Article 21 Feb 2020
The Coronavirus outbreak has sent ripples through financial markets; disrupting world-wide trade, and forcing businesses to make decisions around employee well-being.
Article 10 Feb 2020
Emerging economies are a fairly disparate group, with many barely recognisable to compared to the asset class that existed in the 1990s and even 2000s.
Article 05 Dec 2019
Traditional methods of defensive investing may not have the desired result in today’s market conditions.

This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This document may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, Westpac Financial Services Limited does not accept any responsibility for the accuracy or completeness of or endorses any such material. Except where contrary to law, Westpac Financial Services Limited intends by this notice to exclude liability for this material.

Information current as at 12 March 2020. © Westpac Financial Services Limited 2020.