The timing of the outbreak poses a risk to the investment cycle, says former ANZ chief investment officer Mark Rider.
“Before the coronavirus hit, the global economy looked to post at best a moderate recovery from the slowdown of the past couple of years, with fallout from the US-China trade dispute still evident,” Rider says.
“For Australia the economic environment is also complicated by the fallout from the bushfires over the past couple of months. And all of this has come on top of markets that are looking stretched with valuations typically at rich levels.”
Financial markets reacted quickly to the outbreak. The Shanghai Composite Index fell 7.7 per cent when the market reopened on February 3 after the Lunar New Year holiday, which was extended by three days in an attempt to combat the virus.
News of the outbreak caused the US S&P 500 to lose most of the 3.1 per cent gain it made in the first three weeks of the year. (The index has since recovered and is trading at new highs.)
The Australian dollar fell, although Australia’s share market has been resilient, with the S&P/ASX 200 up 6.67 per cent in the year to mid-February.
“Clearly there’s a real economic and market impact in the short term but these types of events tend to be transient in markets,” says ANZ Private financial planning director David Lipari.
Experience from the SARS outbreak in 2002-03 shows such events tend to have short-lived effects on financial markets and economic growth, says Rider.
SARS first appeared in November 2002 and stopped in July 2003, according to the World Health Organisation. In that time, there were more than 8400 cases, resulting in just over 800 deaths.
“The Hang Seng based around the peak of new [SARS] infections before recovering in subsequent months. Similar patterns were evident in other major share markets,” Rider says.
Economic growth in China also bounced back quickly after a sharp fall due to SARS. Annualised gross domestic product (GDP) growth rates dropped to 3.4 per cent in the second quarter of 2003 from 12.2 per cent in the first quarter, before recovering to 15.7 per cent in quarter three, Chinese Bureau of Statistics data shows
Rider says it’s too early to say what the full impact of the current coronavirus epidemic will be, but he warns it may have greater economic consequences than the 2002-03 SARS epidemic as China is now more important to the global economy.
“For Australia, the dependency on China has risen sharply with over a third of goods exports now destined for China, a five-fold increase. The share of Chinese tourists has risen by a similar magnitude to 16 per cent of total short-term arrivals and now accounts for 27 per cent of total visitor expenditure,” Rider says
ANZ’s latest estimate, in mid-February, was that China’s first quarter GDP would likely slow to 3.2-4 per cent. This is lower than ANZ’s initial projection of 5 per cent based on an assumption of a shorter spell of interruption.
“In Australia the hit is estimated to be 0.5 per cent of GDP in 2020, in contrast with only a 0.07 per cent impact from the SARS epidemic,” Rider says.
This anticipated blip shouldn’t change investors’ approach to their portfolios.
ANZ’s investment managers had already moderately reduced risk in their discretionary diversified portfolios before the coronavirus outbreak really took hold. On the back of ample liquidity, improving investor sentiment and a basing in the global industry cycle, they believe equities have run too far ahead of fundamentals.
The managers reduced their exposure to growth assets, particularly global developed market equities and hedged international shares to provide a more defensive positioning for the portfolios.
“Within defensive assets we took the portfolios to long duration, with global fixed income moved from benchmark to overweight with duration providing diversification,” Rider says.
Similarly, with share markets currently appearing fully priced, investors should display caution says Lipari.
“We’re certainly happy to own share market assets on a longer term basis but we don’t currently see short-term events here as presenting a significant buying opportunity… Undoubtedly some opportunities may arise but our focus remains on seeking to acquire high-quality assets for the long term.”
Read the recent China Insight and Australian Economic Insight articles from ANZ Research.