What does COVID-19 mean for our economy?
Still reeling from the Black Summer bushfire crisis, followed by flooding in some areas, Australians are facing yet another challenge. We are starting to see the Covid-19 outbreak impacting our psyche, and as we follow the news reports of the outbreak while trying to form a balanced view of the outlook (beyond the hysteria), we ask, what impact is the coronavirus having on Australian and global economies?
What's been happening in markets?
We are seeing a major correction occurring in all share markets as investors try to assess the impact of Covid-19. The extensive travel bans and factory closures that we are witnessing is having a very real impact on global economic activity which will consequently impact corporate profits.
The Dow Jones is now down over 12% from a peak reached on 12th February. We’ve also seen the Australian dollar tumble to lows of around 65 US cents; the likes of which we haven’t seen since the GFC in 2009. In addition, the ASX200 has wiped off all its gains for the year to date. We’ve seen impacts on tourism, education, luxury and other sectors, affected through travel bans and factory closures affecting supply chains. As it stands, the future is uncertain until a medical, social and economic response is developed.
However, as we know, uncertainty and fear in markets is nothing new.
The lack of significant data and information has resulted in markets trading largely on news headlines and anecdotal evidence.
In times like these there are a few things to bear in mind:
The correction is occurring at a time when many share markets had reached record highs, with many stocks arguably in over-valued territory
To keep a balanced view, a 2017 World Health Organisation study attributes between 300,000 and 650,000 deaths per annum from the seasonal influenza virus. To date, we have seen 3000 deaths from Covid-19.
What should we expect moving forward?
Clearly, it will be a negative month for many investors, with losses recorded in every sector. It is likely markets will remain jumpy until there's renewed confidence that Covid-19 is under control.
However, a good weighting to cash means we do not have to panic sell and can look to perhaps buy good quality stocks when they get oversold. When the markets recover, quality companies with real businesses and sustainable earnings will be sought by investors once again.
Australia’s Treasurer says the coronavirus has had a bigger effect on the economy than the bushfire crisis, though insists we’re still in a good position to deal with it.
“This is going to have a very significant impact on the Australian economy, not just on the tourism and education sectors that rely on Chinese visitors and Chinese students but also on end to end supply chains. I was speaking to a builder just yesterday about it, who is concerned about their ability to get materials from China, as the factories there are closed.
“And of course, the bushfires, the drought, the floods and indeed the trade tensions between China and the US have all hit the Australian economy as well. This is actually a health crisis primarily, as opposed to a financial crisis…it’s definitely having a broader impact across the global economy and it’s still evolving.
“It is playing out across the rest of the world, but Australia is very resilient, and our economy is in good shape to weather what is clearly a global health crisis,” Mr Frydenberg told Sunrise last week.
Brad Macaulay, Managing Director and Senior Financial Planner says, “This is a painful time for share investors, many of whom have benefited from recent good gains. However, we have been through corrections like this before, and will remain disciplined in our approach to investing at all times. Like others, our industry is closely monitoring this community-wide issue and will continue to keep you informed. As always, we are here if you have any questions in the meantime.”
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