Investment update for February 2020
Global COVID-19 outbreak brings economic effects and responses
The international equity market produced a large negative return in February amid the global outbreak of the coronavirus (COVID-19). China imposed drastic measures to curb the spread of the coronavirus including lockdown, factory and school shutdowns. Other countries implemented travel restrictions and quarantine orders. Since the end of February, the number of new COVID-19 infections has fallen in China, but increased in other parts of the world.
Economic activity in China has been impacted by the COVID-19 outbreak. Although the authorities are now stressing orderly resumption of work and production, high frequency economic data on property sales, coal consumption, traffic congestion and pollution levels suggest the economy has yet to restart in a meaningful way. The flow through to global supply chain disruption has been reflected in exports and imports contracting for some emerging Asian economies.
To counter the negative economic impact, China and other countries announced both monetary and fiscal policies to support their economies. This included interest rate reduction and short-term liquidity injections by the People’s Bank of China to loosen lending conditions. The Federal Reserve had an emergency rate cut of 0.5% and the Reserve Bank of Australia cut the cash rate by 0.25%.
Domestically, Australian equity followed the trend of the global equity market, producing negative returns in February. The resource sector showed the worst performance as commodity prices declined significantly. The annual economic growth increased to 2.2% in the fourth quarter of 2019 and the current account recorded surplus for three consecutive quarters. House prices continued to increase strongly and credit growth is recovering on the back of recent interest rate cuts by the RBA. However, the tourism and education sectors have been hit particularly hard by the travel ban. In response to the virus outbreak, the Australian government unveiled a $17.6 billion stimulus package (0.9% of GDP) to support the economy.
US economic conditions remained robust prior to the virus outbreak. The jobless claims were low and job openings remained at a relatively high level. However, like other countries, the US economy will likely also suffer the negative impact from COVID-19, particularly as President Trump has now announced a travel ban on Europe (ex-UK). The other key development in the US is the Democratic Party presidential primaries. Bernie Sanders and Joe Biden are now the two front-runners.
In Europe, the Italian government has quarantined the whole country. There are also significant cases in France, Spain and Germany. The European manufacturing PMI increased in the month, but with declines in the sub-component for exports orders and the supplier delivery times index. Japan’s GDP growth returned to negative territory as consumption spending plunged due to an October tax hike.
Bond markets continued to deliver positive returns in February, supported by ongoing easing monetary policy and higher uncertainty about the severity and duration of the coronavirus outbreak.
The Australian dollar depreciated further against major currencies in February following the global risk-off sentiment. Oil prices fell due to both the weakening demand outlook from COVID-19 and conflict between OPEC and Russia on the further supply cuts.
Please view our full investment commentary brought to you by our advisers – Frontier – for a more in depth analysis of market conditions this month. The monthly commentary can also be viewed on YouTube.
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