Over the past few weeks, we have seen some significant market movement, due mainly to COVID-19 but recently as a result of a large reduction in oil price. This has had a resonating impact on global share markets and hence has seen some negative impact on investments portfolios.
Whilst we acknowledge the impact this is having and the concern this may create, we remain focused on ensuring your investment portfolios remain well diversified and concentrating on the medium to longer term outcomes, rather than reacting to the short term volatility we are currently facing.
This message is reiterated in Shane’s most recent update, noting that share market falls are normal whilst in terms of Provident’s investment portfolios, although they have been negative over the past few weeks, in many cases they remain positive for the financial year to date and on an annual basis.
This article considers all of the recent issues and the fact there may be more downside to come, however there is also discussion that there are various opportunities to consider and the possibility of a reasonably quick market turn around based on certain factors.
Of course, we remain available to you, our clients to continue support and guidance and please do not hesitate to contact us should you have any ongoing concerns phone us on 9442 0000 or email email@example.com
Coronavirus continues to rattle investment markets as the number of new cases outside China continues to rise posing increasing uncertainty over the impact on economic activity.
And its impact has intensified following the collapse of OPEC discipline causing a further plunge in oil prices raising concerns about debt servicing for oil producers. From their highs global
shares and Australian shares have had a fall of around 20%.
Source: PRC National Health Commission, Bloomberg, AMP Captial
Given the extreme uncertainty this note looks at various scenarios in relation to global and Australian economic growth and what signposts to look at in relation to how it may unfold.
It seems there are two extreme views on coronavirus. Some see it as just a bad flu and can’t see what the fuss is all about. Others think that it will trigger a major humanitarian and economic catastrophe killing millions and triggering a major global recession as excessive leverage is finally exposed. The optimist in me wants to lean to the former:
But I also must concede I just don’t know. There is much that is unknown about the virus itself and how long it will continue to spread. And even if there is a switch to just treating the very sick it’s unclear there will be enough hospital beds. And there is also the human or behavioural overlay which is intensifying the economic impact. Just look at the toilet paper frenzy to see that this can have a real economic effect even before the virus has really taken hold in Australia. While there may be a boom in demand for hand sanitisers, toilet paper and long-life food, this will be a temporary boost as the spread of the virus globally and the disruption that containment measures are causing is continuing to increase the risk of a longer and deeper hit to economic activity. And there is a risk of secondary effects as the short-term disruption risks leading to business failures and households defaulting on their debts if they can’t keep up their payments and so causing a deeper impact on economic activity. The secondary effects of the coronavirus outbreak and its flow on is highlighted by the 45% collapse in oil prices since mid-January. Ultimately lower petrol prices will be a good thing as this will boost consumer spending when the virus goes away but for now all the focus is on the downside of lower oil prices – debt problems and less business investment by producers.
Given all these uncertainties it’s still too early to say that shares, commodity prices and bond yields have bottomed. The following charts present three scenarios for the global economy:
Note: the scenarios show quarterly annualised growth. The key is to focus on the pattern of growth rather than the precise level.
Source: Bloomberg, AMP Capital
The next chart shows three scenarios for Australian growth:
Source: Bloomberg, AMP Capital
Last week we moved to forecasting a recession for the Australian economy in our weekly report. We were already expecting a negative March quarter on the back of the bushfires and the hit to tourism, education exports and commodity exports from the slump in China. But the spread of coronavirus globally and in Australia has made it likely that we will also see a contraction in the June quarter too. As with the global outlook this should really be “a disruption” that will pass once the virus runs its course - hopefully at least as the Northern Hemisphere heads toward summer. The worse case scenarios would likely see a deeper decline in shares and bond yields.
Shares will bottom when there is confidence that the worst is over in terms of the economic impact from the virus and its largely factored in. So, the debate is largely now about how big the hit to growth will be and this relates to how long the virus will weigh on global growth and any secondary effects it may cause. In this regard the key things to watch are as follows:
The rapidity of the fall in share market has been scary. In our view the key things for investors to bear in mind are as follows:
DR SHANE OLIVER
HEAD OF INVESTMENT STRATEGY AND CHIEF ECONOMIST
About the Author
Dr Shane Oliver, Head of Investment Stratgey and Economics and Chief Economist at AMP Captial is responsible for AMP Captial's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
THIS ARTICLE WAS RELEASE BY AMP CAPITAL 10 MARCH 2020, FOR MORE AMP CAPITAL UPDATES GO TO WWW.AMPCAPITAL.COM.AU
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