Covid-19 market impact

Overview

From late December 2019 a new virus outbreak, officially called Covid-19 (a.k.a. “coronavirus”), emerged out of Wuhan, China.To date this outbreak was focused on China which accounted for 96.7% of 80,423 confirmed cases and 98.4% of 2,708 reported deaths (as at February 26)However, in recent weeks we have seen notable growth in cases particularly in South Korea and Italy as well as Japan, Iran and elsewhere in Europe.

Why did the outbreak affect markets?

Investors fear that the outbreak will further weaken the global economy not just China.Fears of spreading elsewhere into Europe would further weaken an already weakly growing European economy.There are now substantiated fears that this may upset global supply chains with companies such as Apple calling out revenue misses and potential difficulty in getting iPhones to market given factory shutdowns in China.Markets had arguably been rallying in recent weeks despite virus concerns on the assumption that it would be contained. This had seen share market valuations become stretched which heightened the damage we have seen in the last week when investor sentiment weakened.

Potential Implications for your portfolio

• Defensive assets like bonds and defensive subsectors such as property have benefited.

• We take a long-term approach to investing in emerging markets with their weight in portfolios reflecting their higher expected risk. Clients are not exposed to undue loss as a result.

• You will see more alarmist headlines such as “global markets lose $x trillion” or “the ASX falls $y billion”

– These headlines are literally true but are unhelpful and misleading. By triggering fear, they help news websites generate traffic and ad sales.

– However, negative daily or even weekly returns in markets can happen often.

– Taking a longer-term perspective is key. Holding for longer periods of time substantially improves the likelihood of a positive return as the below shows for the Australian share market over the longer term.