March 2020 Investment Update

Energy Super’s Chief Investment Officer, Kevin Wan Lum, talks about the economic impact of coronavirus on investment markets and Energy Super’s position.

February 2020 Investment Update

How an event like the coronavirus impacts investment markets

Anyone waiting for a shipment from or exporting goods to China, or scrambling to revise their overseas travel plans, will have felt the effect that an event like the coronavirus outbreak has on investment markets.

Initially, the impact of the coronavirus on investment markets was less about the virus itself and more about the steps taken to prevent its spread. And while that largely remains true, recent fears of a global spread from sudden confirmed cases in South Korea, Iran and Italy have begun to trouble investment markets.

Within China, efforts to contain the spread have led to restrictions on the movement of people within the city of Wuhan and the broader Hubei province. The province remains the worst affected area in terms of confirmed cases and deaths, with an estimated mortality rate of around 3% from a reported 82,000 cases. It should be noted that roughly 1 in 3 people have also recovered from the virus.

Outside of the Hubei province, many people within China have chosen to avoid activities that may expose themselves to the risk of infection: avoiding eating out at restaurants, visiting cinemas or shops, staying in hotels or using public transport.

Global governments have reacted by limiting travel in and out of their respective countries to help limit the spread of the coronavirus, particularly with the recent spread into Europe and South Korea.

The restriction of movement and/or quarantining of citizens causes a slowdown in manufacturing and services. This in turn leads to lower levels of production and/or the closure of factories.

And so comes a series of reactions that begins to impact investment markets:

  • International supply chains – has a considerable impact given China’s significant role in the global marketplace. Particularly affected is the supply of parts in the electronics and automotive sectors.
  • Airlines, transport, hoteliers and gaming – a slowdown in travel overall due to restrictions imposed on travel including during the peak Chinese New Year period has affected these sectors. A number of airlines have suspended or cancelled all flights to/from China including Qantas, Virgin Australia, American and Delta. Other airlines have significantly reduced the number of flights.
  • Industrial commodity (energy and metals) prices – factory slowdowns and closures have led to a decrease in demand.

What about the impact on the economy?

While it’s too soon to confidently predict the full impact on both the Chinese and global economy, it’s reasonable to expect a decrease in growth for Q1/Q2 2020.

In Australia, the short-term effect of the coronavirus on investment markets will mostly impact the tourism and education sectors, and to a lesser extent the mining sector. These are the areas in which the restrictions on movement and travel will have the greatest effect. They’re also the areas affected by the slowdown of production in China and the follow-on impacts on supply chains globally, given the significance of China within the global economy.

Initially, Australian investors appeared to ignore the early threat of the virus – and the impact of bushfires and floods – with the ASX 200 returning almost 5% in January 2020 and reaching all-time record highs.

At the time of writing, global sharemarkets, including Australia’s ASX 200 Index, finished lower for the third consecutive day. To 26 February 2020, the month to date return for the ASX 200 was -4.4%; on a rolling one-year basis – even with the recent negative returns – the ASX 200 has returned 14.0%.

Following previous outbreaks such as SARS in 2003 and H1N1 (swine flu) in 2009, we witnessed short-term returns of between -5% to -15% across sharemarkets globally. Markets then rebounded relatively quickly after the number of new infections started to plateau and fall.

While China is now a more significant presence in the global economy, it’s expected the outlook is similar: if the number of confirmed cases of coronavirus begins to drop, we should expect a reasonably swift return to full production and growth. Naturally, an increase over a prolonged period will delay any market recovery.

As far as Energy Super’s investment portfolios go, there have been no material impacts aside from the short-term market movements.

Kevin Wan Lum, Energy Super’s Chief Investment Officer, says ‘Energy Super doesn’t anticipate making any changes to the portfolio as a result of the impact of the coronavirus in the short term.’

In the longer term, he believes it’s reasonable to expect a negative impact on companies within the mining, education, travel/tourism and consumer discretionary sectors. ‘This is to be expected,’ he says, ‘as companies in these sectors will see lower revenues on the back of lower growth.’

Read about the coronavirus and your super.

Want to talk about your investment strategy?

The vast majority of Energy Super members are in diversified investment options where sharemarkets are just one slice of the investment pie.

However, if you’re not comfortable with your level of risk or you’re close to retirement, it might be a good idea to speak with one of our financial advisers provided through ESI Financial Services*. They can speak with you about the appropriateness of your investment strategy and may help you feel more comfortable.

Depending on your needs, this may be at no cost to you. To arrange an appointment for a phone consultation, contact us.

* Energy Super has appointed ESI Financial Services Pty Ltd (ESIFS) (ABN 93 101 428 782) (AFSL 224952),  a wholly owned entity of Energy Super, to provide financial advisory services to members.

For more information about the Coronavirus, including travel advice, visit the Smartraveller website.

This article is current as at 28 February 2020.

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