COVID-19 Update

The outbreak of COVID-19 is the most significant challenge facing the world in recent times. Since it first appeared in China’s Hubei Province last year, the virus has spread across the globe with the number of infected persons growing exponentially.

Initial reactions have been largely driven by ignorance and panic. While there are still many unanswered questions there is now much more information about the virus available. We now know that for most people the virus will be something similar to an annual flu but for those more vulnerable there can be serious health risks.

Initially, the major economic concern was that factories grinding to a halt in China’s Hubei province and beyond would disrupt global supply chains, causing growth to stumble temporarily. It is now clear that the disruption is far more widespread with the impact being felt in nearly every aspect of economic activity in most countries.

There’s a lot of medical and statistical knowledge about how viruses operate and spread. This knowledge is now being used by governments as they ramp up their responses. The strategy generally being deployed is twofold.

• Firstly, to slow the spread of the virus to allow strained medical systems to cope with the influx of vulnerable patients. Also, to buy time while a vaccine and better treatment is developed. This is being achieved through a range of measures such as restrictions on large gatherings, travel restrictions, lock downs, self-isolation, social distancing and increased testing capabilities.
• Secondly, through the use of a wide range of fiscal and monetary stimulus measures to counter the economic effects of the virus. Interest rates have been lowered and large, multi-faceted spending packages have been announced including assistance to businesses and those facing employment uncertainty.

We know these events are having a considerable impact on most economies and that this will continue in the year ahead. This is causing significant sharemarket volatility. Disruption to companies’ activities is impacting cash flows with the consequential flow on to share prices. In extreme cases such as the travel industry, commercial activity has all but come to a temporary halt. There is a significant knock on effect to employment. Much of the Australian government’s stimulus package is aimed at countering this or softening the impact.

The impact on sharemarkets around the world has been swift and significant. At the time of writing, the ASX 200 had fallen by around 30% from its recent highs. Naturally, investors are spooked by this and are wanting to know how long this will impact their portfolios and when it may start to turn up for the better.

We know that markets will recover. As leading indicators, sharemarkets move in anticipation of what’s coming next. When some end can be seen to the virus and its impacts, markets will start to improve.

Morningstar Research Analyst, Karen Andersen, states that “Overall, we see a weighted average hit of 1.5 per cent to 2020 global GDP and 0.2 per cent to long-run global GDP. We forecast a muted long-term impact because damage to productive capacity will be small, plus economic confidence should quickly return once the virus subsides.” (https://www.morningstar.com.au/credit/article/coronavirus-muted-long-term-impact-despite-ra/200267)

It’s important to remember that sharemarkets have experienced 11 years of successive growth. Market corrections are a normal but uncomfortable part of investing. As always, the best defence against market volatility is a measured, disciplined approach. Panic selling can lead to long-term losses and erosion of wealth.

For those asking when the best time to re-enter the market might be, we recommend having your funds ready. While picking the bottom of a correction is nearly impossible, times like this do present buying opportunities. Successful long-term investors buy when markets are down. They don’t sell at that time.

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