The attached note updates our analysis of the coronavirus outbreak and what it means for the economic and investment outlook and for investors. The key points are as follows:
- While reported new coronavirus cases in China have slowed, the pickup in cases outside China has led to a renewed sharp fall in share markets, commodity prices and bond yields.
- Our base case is that the outbreak will be contained allowing share markets and bond yields to rebound in the June quarter.
- However, the hit to economic activity is deepening and the risks around Covid-19 becoming a pandemic have risen leaving share markets vulnerable to more falls in the short term.
- The rising threat to the Australian economy from coronavirus is adding to the likelihood that the RBA will cut rates in March or April and the pressure for more fiscal stimulus in the May budget is increasing.
- The key for most investors though is to recognise that periodic share market falls are inevitable and hard to time and so it’s best to take a long-term approach to investing and stick to it.
The past week has seen a renewed escalation in concern that the coronavirus outbreak (Covid-19) has become or is becoming a global pandemic. This is first and foremost a human crisis and our thoughts are with all those affected and those trying to combat the outbreak. Naturally though investment markets are starting to become increasingly concerned about the disruptive impact on economic activity. As a result, while most share markets recovered their initial decline on the back of the virus with some hitting new highs last week, we are now seeing renewed sharp falls. This note updates our initial analysis from three weeks ago (see The China Coronavirus outbreak) as to the impact of the outbreak.
Our assessment three weeks ago saw as our base case with 75% probability that the outbreak would be contained within the next month or two. This could still see more downside in share markets & bond yields but there would be a rebound by the June quarter as growth rebounds. The downside case saw a full-blown pandemic with delayed containment resulting in sharp drawn out slump in economic activity, the risk of recession and a 20% or so fall in share markets with the $A falling to around $US0.60. Of course, there are lots of variations around this. We thought the key things to watch are the daily number of new cases and the spread of new cases in developed countries.
Where are we with the Covid-19 outbreak so far?
- First, while the total number of reported cases is now around 80,000 worldwide there has been some good news in that the daily number of new cases is down from its peak earlier in February. This is due to a sharp fall in the reported number of new cases in China. This has been confused by definitional changes in China – with Hubei initially reporting lab confirmed results, then including clinically tested results, then reverting to lab tested results only. However, both approaches have issues & even if it’s roughly right it’s good news if China is starting to get the outbreak under control.
Source: PRC National Health Commission, Bloomberg, AMP Capital