The outbreak of the coronavirus has been a key focus for financial markets in the past month. Equity markets initially fell as did bond yields and the Australian dollar, before staging some recovery as the rate of infections in China peaked and began to fall. However, in recent days equity markets have given up these gains as rising infections outside of China grabbed headlines.
Any market rebound in the coming quarters will depend on:
- if the spread of the disease is contained/controlled
- further easing in financial conditions
- additional stimulus measures from China
The history of previous outbreaks of infectious diseases points to short-term economic weakness which is then largely reversed.
But we are cautious about the limits of historical comparison given the increased size of the Chinese economy and Australia’s dependency. In our view, there’s no doubt that growth data will be affected in the March quarter.
Our chief investment office continues to expect our base case to play out – moderate economic growth, restrained inflation, accommodative central banks and range trading bond markets. Therefore, we retain a constructive outlook for equity markets for the year ahead.
Investment outlook – in brief
We have moved back to benchmark position on growth assets, raising global equities back to a small overweight.
We switched to ‘overweight’ (from benchmark) in Emerging Markets (EM) equities as we see them with more attractive valuation levels and will benefit from a pick-up in growth. Medium term, we believe EM have the opportunity to outperform Developed Markets (DM).
For the Dynamic 30 and 50 portfolios with no EM equity exposure, we moved back to benchmark by going overweight Europe and Japan which we perceive can provide cyclical exposure at a better relative valuation than the S&P 500 in the US.
We have reduced the ‘overweight’ position in global fixed-income assets due to lower bond yields. Tactically, we see yields remaining range-bound.
We have also modestly increased the hedge ratio following a weakening in the Australian dollar. This move is in line with the change within our regional equity exposure. We are still below benchmark on the hedge ratio which provides a more defensive positioning for our international equity exposure.