A steady stream of news headlines is keeping concern and speculation about the coronavirus at the forefront of public discussion. This is not without good reason, with the number of confirmed cases almost exceeding 40,000 and reported deaths increasing every day. Comparisons are being drawn with the SARS outbreak in 2002-03 and speculations made about the long-term impact of the current outbreak.
Historically, uncertainty isn’t good for financial markets and typically we see an increase in volatility during global events where there are unknown outcomes (in recent years think Greece’s financial crisis or Brexit).
It seems inevitable that the emergence of the coronavirus, and subsequent containment responses by authorities, is going to have an impact on China’s GDP. As the world’s second largest economy and largest contributor to world GDP growth, investors are understandably worried this could lead to a global economic downturn. For Australian companies, those in the tourism and airline sectors are likely to be most impacted initially.
While this is foremost a human crisis, China has been quick to try and alleviate financial concerns by announcing that they will provide liquidity and monetary policy to support their economy. Similarly, Central banks around the world may also respond and support markets if needed.
Whilst serious, it is important to keep the current outbreak in context. Historically, most pandemics have taken 6-18 months to run their course however this timeline is significantly reduced when there is a swift reaction by authorities, such as the bird flu in 2005-06 or the swine flu in 2009, which ended up only having a very modest economic impact.
We can take comfort that medicinal advances, improved health crisis management in China and coordinated government responses should all help to prevent a major outbreak occurring. In the short term we expect to see markets continuing to react to the daily virus updates, however we also expect this volatility to subside once the spread of the virus is contained and global travel restrictions are removed.
If you have any questions about the above, please call your Prosperity Financial Adviser on 1300 795 515 to discuss.
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