THE 2020 RALLY CATCHES A COLD
Mark Lister, 3 February 2020
After a very strong finish to 2019 and an impressive start to this year, financial markets have found something new to worry about in the form of China’s coronavirus scare.
Investors were feeling fairly relaxed in early January, with central banks around the world promising to keep monetary stimulus flowing and with a trade détente between the two biggest global economies having been achieved.
Somewhat predictably, it’s often something from out of left field that throws a spanner in the works.
At this stage, our guess would be that it’s not going to be a showstopper for the global economy, although we think it gets worse before it gets better. It could lead to a buying opportunity for investors, but we’re not quite there yet.
In recent days we’ve seen a plethora of important earnings releases, some major central bank meetings, and Britain finally Brexited.
However, growing fears over the spread of coronavirus and what it could mean for economic growth have overshadowed all that, with risk assets sold off sharply as investors flock to safe havens.
The Dow Jones index in the US fell more than 600 points (or 2.1 per cent) on Friday. That was the worst day since October, and it wiped out the gains for all of January.
Oil prices have slumped 15 per cent this year, while bonds and fixed income assets have outperformed. The 10-year US Treasury yield fell below 1.5 per cent last week, the lowest since September, and parts of the yield curve have become inverted again.
Markets are nervous, and why wouldn’t they be? There are around 14,000 confirmed cases of the virus right across the world, and the death toll has risen to more than 300 (as of Sunday afternoon).
Cities are in lockdown, airlines are suspending flights to China, and consumers have stopped dead in their tracks in places. Technology behemoth Apple has gone as far as closing all of its stores and corporate offices right across mainland China.
Then again, let’s put things in perspective. Coronavirus is being compared most closely to the SARS outbreak 17 years ago.
Between late 2002 and mid 2003 this saw more than 8000 cases and 774 deaths reported in 17 countries, which equates to a fatality rate of almost ten per cent.
Coronavirus deaths are tracking at a much lower rate of two to three per cent, and all of these have been in mainland China. This suggests we are dealing with a more benign illness.
However, many who have contracted the virus are still sick, so the death toll could rise over the coming weeks and months. It is also spreading much more quickly than SARS did.
It’s impossible to predict how this situation will play out, but from an economic perspective the biggest impact could be from the change in consumer behaviour rather than the virus itself.
Even if the illness turns out to be more subdued than SARS, the Chinese economy will feel the effects of it, as will those countries and companies doing business with the affected regions.
Travel and tourism will be hit hardest over the near-term. In New Zealand, that suggests the likes of Tourism Holdings and Air New Zealand could face added challenges, and to a lesser extent Auckland Airport.
Discretionary spending will also suffer, as people stay home on lockdown rather than heading out for food, shopping or entertainment. Vista Group could face the brunt of this, while it’s harder to estimate what any impact on a2 Milk, Scales or Comvita might be.
China remains the biggest export market for New Zealand, so the likes of Port of Tauranga and Napier Port might see some short-term disruption amongst some of their customers, such as the forestry industry.
Commodity prices (most notably oil) will remain under pressure, along with higher risk assets like shares and currencies such as the NZ and Australian dollar.
Beyond that, a coronavirus induced sell-off could prove to be a buying opportunity. However, that hinges on the outbreak being contained, for which the timing and likelihood is unknown at this point.
The SARS experience suggests the panic won’t subside until the number of new cases peaks and begins to taper off. Until then, investors and market watchers should expect the nervousness to continue.