Last week the US stock markets enjoyed their strongest week since June 2019. That such a move could occur at the top of the range, at an all-time high, is quite remarkable. However, that such a move happened while a viral epidemic is having a demonstrable and negative effect on global economic activity is almost unbelievable.
Led by the US bourses, global stock markets are experiencing their greatest rallies in history.
And why wouldn’t they? Fiscal and monetary authorities are conspiring to keep prices rising, and despite lofty valuations – there have been no significant shocks that could be reasonably expected to send prices lower.
Until now.
The Wuhan coronavirus is starting to have a noticeable impact on corporate activity. More than half of the British companies surveyed by the British Chamber of Commerce in China said the hit from the outbreak on their business had been significant, while 97 per cent had been adversely affected in some way. On top of this, sixteen percent of US companies surveyed believed that the coronavirus would wipe two percent or more off China’s GDP growth this year.
It comes as ASX listed Cochlear (COH) announced reduced earnings guidance due to the coronavirus impact in Greater China – stating that profit for FY20 will be reduced by $10-20 Million. Cochlear’s CEO & President, Dig Howitt said in the accompanying statement that, “It has become clear that the coronavirus will impact the number of Cochlear implant surgeries in Greater China, a top 5 market for Cochlear.
Flight Centre (FLT) has also released announcements to the market where they stated that the impact of the coronavirus was “too early to judge” but will “make it more difficult to achieve 2020 fiscal year (FY20) guidance”.
Oil stocks have also been feeling the taint of the virus, with oil prices being hammered since the initial outbreak. Prices have fallen from around $60 a barrel, to roughly $50 a barrel for US crude. Such a dramatic fall will start to eat into the profitability of oil producers and the longer that prices remain subdued, the worse the damage to the bottom line.
Tourism is one industry that is forecast to lose out from the travel restrictions associated with the virus. Singaporean authorities forecast that the virus will reduce tourism numbers by 25-30 percent this calendar year. Our own travel restrictions on Chinese travellers will likely impact many tourism operators in Australia and it will be interesting to see how this affects listed companies.
Some economists are forecasting that the coronavirus and the measures taken to control it could reduce Chinese GDP growth this year by two percent. Our own Reserve Bank has warned that the virus, in addition to the bushfires, threaten to cause negative domestic economic growth in the first quarter of this year. It is therefore of great surprise that markets are reaching fresh highs and as such I believe that at the moment, it pays to be cautious.
Sam Green is the Portfolio Manager at Emerald Financial, whilst also being an Equities and Derivatives expert for his clients at TradersCircle.
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