COVID-19 Coronavirus update

The COVID-19 coronavirus outbreak has caused share market volatility, creating concerns for some investors.  legalsuper’s Asset Consultant Willis Towers Watson has prepared a special update in relation to COVID-19 and the full update is included below.  We remind our members that when panic drives markets, it is wise to consider your long term perspective, take a step back and assess events and information in context and with calm.  The update below is specifically in relation to COVID-19 - we provide broader commentary in our Share Market Volatility update (prepared 10 March 2020).  If you are concerned and would like to speak with an experienced superannuation specialist, contact us for an appointment with a member of our Client Service team  

The following update is from Willis Towers Watson,  the views, thoughts, and opinions expressed in the text belong solely to the author.

In our recently issued Global Investment Outlook – which takes a medium to long-term perspective on investing – we described three big uncertainties. First, less policy room for central banks to address a shock. Second, risks to corporate cashflows are higher than risks to economic growth. Third, politics and/or geopolitics could cause an “exogenous” market shock. In the nearer term, we can add COVID-19 to this list of impactful shocks. COVID-19 has the characteristics of a “black swan” event, i.e., it is unpredictable, it could potentially have a very large impact, and after the event and with the benefit of hindsight it can be more easily explained.

Since the beginning of the year, the coronavirus (COVID-19) has spread from China to many parts of the world, and as at the end of February around 30% of the global economy had meaningful outbreaks of the virus. In China, travel and work restrictions have severely impacted the manufacturing sector. Chinese PMI (a measure of manufacturing output) recorded an all-time low in January and output continues to be well below what it was prior to the outbreak. China’s significant role in global supply chains means that the reduced output from Chinese factories has significant global implications, particularly for those with close linkages to China. This obviously includes Australia, where industries such as tourism and education are reliant on the number of Chinese visitors/ students and the mining sector is very reliant on Chinese manufacturing.

We expect a global economic contraction in Q1 driven by the contraction in activity in China, due to the substantial shut down in production facilities that has already occurred. Whilst we do not rule out a longer lasting impact, we believe that current data suggests a relatively short-lived scenario is the most likely outcome. In our base case scenario, we expect the majority of impact on the Chinese and global economy to be temporary in nature, i.e. a short-lived decline in activity which subsequently unwinds by the end of 2021 and which does not result in a permanent shift lower in the overall level of global GDP.

Equity markets have fallen significantly since the spread of the virus to advanced economies and daily volatility has been high, reflecting both the uncertainty and unpredictability of the risks. Bond yields have also fallen sharply, in the US especially, due to policy rate cuts, lower short-term growth expectations, and negative sentiment. We expect financial market volatility to continue in the short term driven by any deceleration or acceleration of the number of virus cases and short-term economic activity statistics. However, if we are right that world and country growth will sequentially recover over 2020/21, we would expect those growth-related assets that have sold off the most (i.e., equities) to also recover. However, it is entirely possible that this is from a lower price level than today.

Most importantly, we extend our sympathies to the communities and families that have been affected by the virus.

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Please note that this investment commentary does not constitute advice.  The views set out in this document should not be used to make asset allocation decisions without associated advice provided by a Willis Towers Watson consultant.