The past week has seen a renewed escalation in concern that the coronavirus outbreak (Covid-19) has become or is becoming a global pandemic. This is first and foremost a human crisis and our thoughts are with all those affected and those trying to combat the outbreak. Naturally, though investment markets are starting to become increasingly concerned about the disruptive impact on economic activity. As a result, while most share markets recovered their initial decline on the back of the virus with some hitting new highs last week, we are now seeing renewed sharp falls. This note updates our initial analysis from three weeks ago (see The China Coronavirus outbreak) as to the impact of the outbreak.
Our assessment three weeks ago saw as our base case with a 75% probability that the outbreak would be contained within the next month or two. This could still see more downside in share markets & bond yields but there would be a rebound by the June quarter as growth rebounds. The downside case saw a full-blown pandemic with delayed containment resulting in a sharp drawn-out slump in economic activity, the risk of recession and a 20% or so fall in share markets with the $A falling to around $US0.60. Of course, there are lots of variations around this. We thought the key things to watch are the daily number of new cases and the spread of new cases in developed countries.
The spread of cases beyond China has raised increasing concerns that Covid-19 is becoming a global pandemic. While we and others have made comparisons to the SARS outbreak of 2003, the swine flu pandemic of 2009 is also relevant. Despite efforts to contain the disease, it is estimated to have ultimately infected 700million to 1.4billion people but because its death rate was low at around 0.02-0.04% it doesn’t get referred to much. Partly due to this swine flu had little impact on the global economic recovery of 2009 although it did occasionally rattle share markets. Though Covid-19’s mortality rate looks to be greater than that of swine-flu it’s worth noting that swine flu’s mortality was initially reported to be as high as 9.5%.
Whether Covid-19 is soon contained, turns into a re-run of swine-flu or something a lot more deadly remains to be seen. Our base case remains one of containment by the end of March. But the risk of it taking longer is significant and in any case, it’s increasingly clear that the economic impact will be quite severe as containment measures spread globally disrupting supply chains and spending.
The increasing global spread of the coronavirus has increased the risk of greater economic disruption for longer resulting in say a 20% fall in share markets. However, our base case of containment is that Chinese, global and hence Australian growth will rebound in the June quarter (avoiding a recession in Australia’s case) although the risk of a delay is significant. Against this background share markets, commodity prices and the $A remain at high risk of more downside in the short-term but assuming some containment and a growth rebound in the June quarter markets should rebound by then. Easier than otherwise monetary and fiscal policies – with ever more stimulus measures announced in China and more monetary and fiscal easing globally – would add to this. The key things to watch for remain a further downtrend in the daily number of new cases globally and a peak in new cases in developed countries.
In a big picture sense, the fall in share markets should be seen as just another correction after markets ran hard and fast into record highs this year from their last decent correction into August last year.
Finally, for most investors given the obvious difficulty in trying to time any of this – whether it’s a further share market fall of 5% or 20% or no further fall at all and then when to get back in – it makes sense to turn down the noise around the virus and stick to a long-term investment strategy.
If you have any questions about this please contact us.
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