COVID-19, better known as Coronavirus has recently given us a look into just how fragile the world we live in actually is.
What is a coronavirus?
According to the World Health Organisation, coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recent discovered coronavirus causes coronavirus disease COVID-19.
We believe it is important to firstly acknowledge that this virus is about the human toll that it has taken, with loss of life, illness and widespread personal impact worldwide. Our thoughts are with those that are directly affected by this illness.
The last week, in particular has seen world share markets react to the situation with fears of long term deep sustainable consequences to the world economy.
If we look at the world’s largest stock market in the US it has dropped the best part of 11% in the last week, its largest weekly fall since the GFC in 2008. Interestingly very late in trading on Friday afternoon in the US, the market rallied some 2.5% in the last 20 trading minutes after Federal Reserve Chairman Powell made an unscheduled statement saying that the central bank would act to support the economy as required.
Back at home in Australia it has been much of the same. Australian Share market was off just shy of 10% for the week as well.
What does this all mean for investors. In the short term for investors it means that we have given back the gains made in the calendar year 2020. When looking back over the last 12 months however the numbers still read positive.
What to do as an investor in these situations? Do we see this as another market correction, as per the one we had in August last year or is something more systemic?
Then only comparisons we have to draw upon are previous such outbreaks and what happened back then. In 2003 when we had the SARS outbreak the world markets declined for two months before recovering the losses within the next two months and surpassing previous levels beyond that. This time may be different, it is impossible to tell. This time we are coming into this with markets having rallied with positive momentum for quite some time. A lot of this depends on how quickly we can get on top of this and how quickly those amazing people in medical research that we seldom hear much about can find a solution. When compared to SARS, the coronavirus COVID-19 appears to be more contagious however its mortality rate is far less according to the World Health Organisation.
Regardless of the time taken to find a solution it is imperative to remember as investors we need to ensure we are able to follow the process of being disciplined investors and not jump at shadows, driven be fear and fuelled by the instant world of information we have today. The reason we have diversification in our portfolios, and why we allow enough cash for short term requirements is exactly now. It is why we are not selling assets at the most inopportune time. As difficult as it is to stay in the market, it is just as difficult to time when to get out and then having made one tough decision try and figure out when to get back in.
This virus is going to have a significant effect on Chinese GDP, the believed origin of the virus, and this will particularly come to light at the end of the first quarter in 2020. The one thing we do know is that Chinese President Xi Jinping has a growth mandate that he wants to ensure is achieved. If this means more stimulus to make this happen, we expect direct action form the Chinese government.
In the US, whilst we need to take everything said by President Trump with a grain of salt only a week ago speaking from India he predicted a massive stock market rally if he is re-elected later this year and an “epic crash” if he is not. In a world where we must take cues from more than just economic fundamentals self-interest and ego seems to point to a President that will also want to head into a presidential election in November2020 with markets as buoyant as possible.
Back home, the Reserve Bank of Australia (RBA) meets on Tuesday this week, with mounting pressure for a rate cut, if not now then in the very near future should the situation persist. We await the Tuesday 3rd of March RBA announcement at 2.30pm with interest. With the cash rate already at record lows of 0.75% the RBA needs to think very carefully about using what little ammunition they have in the form of interest rates.
History has taught us that patient investors will be rewarded over time. As investors we always need to come back to the question. Are my objectives being met? The Innate Wealth Investment Committee will continue to monitor the situation and ensure that the portfolio construction process remains robust and stacks up in the volatile investment markets that we are now experiencing.