No doubt, after many weeks with coronavirus, dubbed “COVID-19”, lingering in the background of U.S and Australian corporate reporting season, investment markets, have reacted strongly over the past week.
On public health concerns and uncertainty over the economic impact, we saw a sell-off in equities and yield on “safe-haven” 10-year Treasuries being pushed to record lows. We provide our thoughts below and as Australian reporting comes to a close, we reproduce commentary provided by our analysts.
Impact of the Coronavirus thus far. To date, we have yet to observe the financial impact as Australia corporates report results as of the end of December 2019 and much discussion revolving around initiating contingencies to cater for the potential virus spread. No doubt, we expect the impact to be more felt in the next round of results being reported in 6 months’ time including potential earnings revisions. Indeed, we wrote elsewhere that multinational corporations such as Apple, Starbucks, McDonalds, Hyundai have announced temporary store and business closures across Asia. Further, countries including Singapore and Japan have lowered growth forecasts due to supply chain disruptions and revised consumption and investment expectations.
Where to from here?
(1) Monetary policy support: Interestingly, central banks globally have taken the approach of “monitoring” the situation rather than proactively making changes. In our view, if the situation is prolonged and the contagion effect occurs out of China, it will force the hands of policy makers.
We do expect the economic slowdown globally to lead to cuts by the U.S. Federal Reserve and Reserve Bank of Australia (RBA) (the Fed to cut rates in March and we expect a higher chance for a cut in April).
So yes, you will likely get more efforts from central banks, but this is not a liquidity crunch as such. Cities (and businesses) are shutting down in order to contain the virus not because there isn’t enough liquidity. Nonetheless it should help market sentiment.
(2) Fiscal policy support: We expect more to happen on this front globally. Even Australian PM Scott Morrison, who has resisted calls to use the balance sheet, has flagged it. Government implementations can be slow and not necessarily methodical. Nonetheless we think this is important and positive move to support economic growth.
(3) Implications for portfolios – We are looking to deploy cash: Going into 2020, much of the consensus thinking was to deploy more capital to benefit from an equities re-rating off the back of central bankers lowering interest rates. Indeed, in a declining interest rate environment, even businesses with flimsy models are not challenged. However, whilst the macro story of lower interest rates for longer remains true, we continue to monitor stocks which are leveraged to the China story and businesses that may be affected from COVID-19.
The market is now in a mini correction (more than -5% decline) and corrections can be as much as -20% (before a bear market takes hold – which typically requires a recession). At this stage it looks as though it may be a buying opportunity – especially investments which were previously trading at elevated multiples. But just buying the dip is dangerous, in our view.
We prefer to await economic data to get a better handle on what is actually flowing through versus anecdotal accounts.
*This article is just a snippet of the full article sent to clients of BanyanTree Investment Group. Find out more about them here.
Investment Manager / Director at BanyanTree Investment Group
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