Coronavirus Impact for Hudson Investors

Friday, March 06, 2020
Coronavirus Impact for Hudson Investors

What a week we have just had in local and international share markets! 

Ten percent falls and more marking “technical corrections” in many markets – it has been a sober lesson for all investors.  The share market – in the very short term - can indeed be ruled by Fear as well as Greed  

So why have we seen these falls?  In one word: Coronavirus

Coronavirus – what is it and what has happened so far

Unless you have been living under a rock for the past month you will have heard about the outbreak of a new form of coronavirus.  

 A coronavirus is one of a variety of viruses that has been infecting humans for millennia causing coughs and colds.  The difference this time around is that this newer type are infecting people causing more serious illness and even death.  

We have seen coronavirus outbreaks before and often with serious outcomes.  The SARS (2002) and MERS (2012) epidemics were coronavirus and this latest one is something similar with it own mutations

It has been labelled COVID-19 and originated in China. 

Specifically it was first identified in Hubei province in southern China in January.  It is thought that the epicentre was a live animal market in the city of Wuhan (a city of 11 million +) where the virus has made the leap from animals to humans.

People who have contracted the virus are thought to have a two week incubation period after which they (may) show flu like symptoms such as fever and a dry cough. For most (80%) these symptoms are mild and they recover but for those in high risk categories (particularly the elderly) it can prove fatal   There is a 2% fatality rate on current cases.

The virus is spreading rapidly – as did SARS – and has expanded out of China to many places around the globe. The next few weeks and months will likely see cases on most continents and the World Health Organisation will likely declare it a pandemic – although it has not done so just yet.

The authoritarian central government in China has gone into overdrive and has locked down vast areas of the country imposing massive restrictions on movements in the hope of containing the outbreak.

China has seen the level of reported cases peak around 80,000 but the level appears to have now peaked – if the official reports can be believed.

What economic Impact are we likely to see

The economic impact depends upon the extent of the spread of the virus and the magnitude and duration of the disruptions to economic activity.   

The epicentre of the virus in China has seen wholesale factory closures over the past month as the government attempts to contain the virus and this has had an impact on the global supply chain. 

China has over the past two decades become the “worlds’ factory” and this virus has impacted the manufacture of goods we all use in everyday life.

The inbound Tourism industry has taken a massive hit and will likely continue to see further falls in traveller numbers as the government imposes more bans on tourists from high risk countries.

Education – another big industry in Australia – is feeling the brunt of travel restrictions on Chinese students and this flows through to not just universities but to accommodation and other service industries associated with the education sector.

So what about some GOOD NEWS?

As with all Coronaviruses this outbreak will eventually end.  This will occur when enough people develop immunity through the infection itself or through immunisation so the virus cannot spread any further.  This is what happened with previous coronaviruses such as SARS.

The northern hemisphere summer will likely make things harder for the virus to spread in the warm weather.  

We have much better knowledge of how these viruses spread than we did even 20 years ago and public health in most western economies is also a lot better than it was in the past.

Eventually this virus will peak and peter out. 

Containment is difficult but many countries are valiantly attempting to try and limit the spread of the virus till it exhausts itself.  SARS and MERS were eventually stopped by a combination of these and other actions.     

The curbing of economic activity in tourism and educational services will likely see a resurgence later in the year. 

Pent up demand for travel will likely see a larger spike after mid year when the fear and the “peak” of the virus are likely to have subsided.

Universities that are impacted by the slow trickle of returning students to the physical campuses are offering online courses they can complete back home and it is unlikely that a student who is half way through a course at a prestigious Australian University will simply transfer to a local Chinese university or go to another country that have similar travel restrictions.

How and Why have investment markets reacted the way they have

In a word : uncertainty. Markets hate uncertainty and at present the outlook is clouded.

Initially in January and early February the major global share markets dipped on the news of “a new contagious virus originating in a vaguely known Chinese province“  but promptly recovered and went on to set new records in mid February.

Then the virus spread rapidly and the world looked on aghast at how China was trying to contain it via lockdowns of mega cities of 10 million + and building hospitals in a week!

Finally the market tweaked that maybe this was a bigger deal than they first thought and the panic selling set in last week.

So what happen form here?

The virus will keep spreading and likely be present in all continents in coming months. We live in an interconnected world more than ever and this is a highly infectious disease.  However so is the flu and we live with that every winter.

The mortality rate is higher than the flu but still only 2% of those infected and predominantly in those most at risk – those already ill and the elderly.  Work on a vaccine has been progressing over the past few weeks and by all reports progressing well, however it will be later this year or early next before a vaccine that may combat the worst of this virus can be produced.

How far have markets fallen?

Last week the US markets fell 12% - the fastest fall into correction territory in many years.  The local Australian bourse followed suit with a fall of over 10% in five trading days.   There was nowhere to hide.

So what should the reaction be from Hudson Investors?

The current market gyrations are likely to continue for the next few weeks at least.   We may see more falls in coming days and we may see recovery rallies as aggressive investors try to snare a bargain at the “bottom of the market”

Central banks will likely cut interest rates (as the US Fed has indicated) and the RBA meets on Tuesday locally.

What you do as an individual investor will be contingent on your individual circumstances and you need to take advice from your Hudson adviser on what you should do in a individual sense.

However as a broad general comment I offer these following points:

  • We are all long term investors. We always talk and warn about big irrational market falls that beset share markets from time to time.  We have all seen them over recent times in relation to North Korea, Iran, Fukushima Tsunami, Brexit, Trump etc.   That is where we are at now. Yes this is potentially a major economic impact for the world economy from this pandemic and profitability for individual companies will be impacted for a time and some movement in share prices is to be expected.
  • However some context needs to be applied. The falls last week take the Australian market back to where we were in August last year – yes six months ago.  However the markets are substantially up from the beginning of 2019.   
  • If you are fearful ask yourself these questions:

Have my long term goals changed because of this news? 

Has my risk profile changed?

  • Markets will recover but timing is unknown and will likely be linked to containment and the end of the economic disruption.
  • If you are in allocated pension client your pension will continue to be paid and life will go on as normal. Your absolute pension balance will be lower than a week ago but is that a life changing event?   Your day to day financial balance sheet value will always wax and wane.  This scenario is exactly why we employ the “bucket strategy” that segregates volatile growth assets from your defensive assets from which your pension is paid.   
  • There is little alternative from fixed interest where yields are still as low as they were a week ago and likely to reduce further if we see more interest rate cuts in coming months.

The best general advice I can give to all is:  Stay the course. 

Feedback

Geoff and Margie Stanley commented on 02-Mar-2020 05:39 PM
good advice as usual thanks
Peter and Kau Crowder commented on 04-Mar-2020 11:29 AM
The waves are crashing on the bow of my investment ship, yet I can still see the horizon of wealth.

I for one are staying the course.

It is reassuring to have the right advise from people that I can trust know their business - thanks Phillip!

Regards - Peter Crowder
Chris and Lorna Elsmore commented on 07-Mar-2020 12:46 PM
I have been a member for 26 years and have rarely deviated from your advice.
We live very comfortably, thanks to you. Keep up the good work.

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