Investment Update – March 2020

The first quarter of 2020 will forever be remembered for delivering one of the greatest health and economic shocks of all time. The economic damage was an inevitable consequence of governments worldwide taking unprecedented action to curb the spread of the novel coronavirus that emerged in China in December 2019.

With numerous countries enacting harsh measures to reduce person-to-person spread of the virus, many sectors of most economies effectively ground to a halt. Tourism, travel, entertainment and hospitality were particularly badly affected, but the fallout will be felt far and wide for some time to come.

By The Numbers

Financial markets (and many governments) were slow to appreciate the magnitude of the coronavirus threat. Major share markets rose steadily, setting record highs on 20 February, then, as the likely economic consequences of tackling coronavirus became apparent, markets plunged. From its peak of 7,163 the Australian S&P/ASX 200 index fell to 4,546 on 23 March. A rally then saw the index rise to 5,077 at the end of March, 24% down from the start of the quarter.

In the US, the S&P 500 fell 34% from top to bottom. The MSCI All-Country World Equity Index dropped 35%. Both indices recovered ground at the end of the quarter to limit January to March losses to 18% and 21% respectively.

The Reserve Bank moved quickly to further cut interest rates to 0.25%. This is as low as the RBA is prepared to go, with the Governor indicating this rate will be with us for several years to come. Partly in response, and partly due to investors seeking the relative safety of the US dollar, the Australian dollar plunged from US$0.66 US to US$0.55. It then staged a partial recovery to end the quarter at US$0.61. Falls against other currencies were less severe.

Massive Stimulus

Governments around the world responded with programs that will, over time, pump almost unimaginable sums of money into the economy – hundreds of billions of dollars in Australia, trillions in the US.

The focus is on helping employers retain staff, to provide income support to people who do lose their jobs, and to assist pensioners. One aim is to minimise economic disruption now to facilitate a quicker recovery once coronavirus is brought under control.

Outlook and Implications for Investors

Only time will tell how long it will take for the virus to be brought under control, and for normal life and business activity to resume, in Australia and in other countries. What is clear is that governments around the world have committed massive amounts of stimulus, which can be expected to take effect eventually. This could mean that a recovery in financial markets, triggered by good news about the virus and/or case numbers, might be just as sudden and substantial as the crash. On that basis, investors may wish to continue accumulating growth assets while they are cheap, or else holding steady for a recovery over time.

Economic indicators – 27 March 2020                   1 year % excluding dividends

Australia: ASX 200

-21.1

Japan: Topix

-9.3

China: CSI 300

-0.9

UK: FTSE 100

-23.4

US: S&P 500

-9.4

Australia: Current at 27 March 2020

 

$AUS : $US

0.61

Official interest rates (%)

0.25

Australian 10-year bond yield (%)

0.92

 


Published : 23 Apr 2020