As many of you would have been following, investment markets locally and globally have fallen sharply this week on renewed concerns regarding the Coronavirus, or Covid-19, as it’s known.
At the time of writing, both the Australian and US equity markets are down more than 8% for the week, with Europe down more than 6%, and Japan down more than 5%. US technology stocks are down almost 8%.
Up until the end of last week, investors had largely ignored the Coronavirus on the basis that:
That was all forgotten over the weekend as we saw a sharp rise in reported Coronavirus cases in South Korea, Iran, and Italy, largely due to lax preparedness and protocols from those countries or the complacency that China had already contained it.
This has resulted in the use and reference of words like “pandemic” based on the technical definition of disease existing on more than 2 continents. News headlines have done a spectacular job at making sure that the word pandemic is fixed in our short-term memory for now.
At the time of writing, we know the following:
From a non-medical perspective, we know that local and global economic growth will take a hit in the short term as will corporate earnings in light of the response from governments and corporates to shut down cities and ports, restrict travel, and enact significant quarantine protocols.
This is difficult to say.
Considering markets paid little to no attention to the virus until this weekend, you could argue that the virus is a lot worse than we think/know and that the falls this week were necessary to temper the gains in the market since the beginning of 2020.
In contrast, you could argue that the sell-off this week is a mass overreaction given recent corporate earnings reports had been stronger than expected, central bank cash rates remain at very low levels whilst central bank balance sheets remain bloated (money printing), central banks remain ready to provide more stimulus in the short term if required, and recent political risks (US-Iran, US-China, UK-Europe) had subsided.
From a structural perspective, a significant amount of daily trading activity is now done by algorithmic / ETF / quantitative (computer) trading, with only a small proportion done by discretionary traders. This means that markets tend to be more momentum driven than ever before, both upwards and downwards, which exacerbates the short term peaks and troughs in markets.
The short answer is NO, especially for those with a long term investment horizon (all of our clients).
Underlying conditions still remain very supportive of equity markets pushing higher over the medium term. Given yields on cash and bonds remain extremely low, investors won’t want to sit in low yield assets for too long. For example, the most recent sell-off we had in equity markets occurred in the 4th quarter of 2018. By the week of Christmas, the P/E ratio on the US equity market had fallen to 14 times, and investors swiftly saw value against very low yields on cash and bonds, which preceded the spectacular returns we saw in 2019.
We think a similar response is possible in the near term, which could be further supported by a local and global fiscal (government) and monetary (central bank) response. Once investors find value, the significant sums of money sitting in cash and bonds globally will rotate back into equities. However, investors may take a little longer than expected to get settled given the very fluid situation when it comes to a virus.
On the health front, we can’t stress enough the importance of personal hygiene. Take care of yourself and the others around you.
On the investment front, during these times of volatility, we should remind ourselves of the following:
Financial Keys continues to monitor market developments. If you would like to discuss your particular portfolio or investment strategy please don’t hesitate to contact us.
Mark, Brendan and Matt
The Australian equity market (ASX 200), although starting the quarter in good spirits and continuing to rally, driven by lower-than-expected inflation data and positive sentiment, witnessed an acceleration in market volatility due to various economic and political factors. This did not deter investors as the index made history on 17 July by surpassing the 8,000 mark and closing at an all-time high of 8,057. Off the back of positive momentum supported by optimism of interest rate cuts by the US Federal Reserve as early as September the benchmark delivered a strong quarterly return of +7.8%.
A new generation of just over 5 million Australians – born between 1965 and 1980 – are approaching their retirement years.
The Australian equity market (ASX 200), ended the quarter in the red (-1.1%). Higher than expected year-on-year core inflation readings flowing through from the March quarter attributed to the weak performance whilst market anxiety also increased at the thought of a possible rate hike - a long way away from the cuts that had been priced in earlier in the year and in late 2023.