Since the discovery of the Coronavirus in China, it has been hitting front page news and has had a direct impact on global stock markets. Our colleagues at RHIM have been monitoring these outcomes and we would like to share their observations with you.
“The rising cost of the coronavirus outbreak for business and the world economy has become a little clearer this week as major firms issued trading updates and China released factory output data. Quarantine efforts to contain the disease are disrupting supply chains which are likely to result in damaging consequences for companies around the world.
The response from all the Central Banks has been muted as they are awaiting “hard data” before deciding what, if any, stimulus is required. The four leading US institutions have commented that their expectations for company earnings will reduce substantially.
We believe it’s important to put things in perspective.
This is a respirated virus which most people should recover from. The World Health Organisation yesterday reported 82,294 global cases with only 3664 diagnosed outside China. Governments around the world are taking a pro-active approach to help quarantine victims as soon as possible to stop the spread.
Investors have seen significant returns over the last 5 and 10 years. We have commented in the past that earnings have been slowing and valuations were partially stretched in the US. At some point, there had to be a realignment. The Coronavirus was the “excuse” to start taking profits and this is a normal with long term “Bull market” cycles.
Some commentators are suggesting we are seeing a similar pattern to 2008. We disagree. There is no financial crisis in 2020. The impact of Coronavirus is all about supply chains. Global companies such as Apple and Microsoft are heavily dependent on components from Chinese factories. Airlines and Tourism stocks will be hit due to the quarantine policies. Capital cities will see reduced tourist numbers which will have a direct impact of local economies. Hotels on the east coast of Australia are empty due to Chinese tourism grinding to a halt. These factors are temporary and will reverse as soon as the virus is brought under control. It appears to be flu-like which suggests that conditions should improve as the weather warms.
Since the beginning of the year, we have made some “tactical” changes to our portfolios. For instance, we have reduced our exposure to expensive assets such US Treasuries as well as US and Japanese assets. We have highlighted areas which will benefit from a lower US Dollar such as emerging markets. We have maintained our exposure to Gold as well as infrastructure funds. As with any “sell off”, our portfolios are not immune. However, our actions have protected our portfolios from excessive falls. We are now turning our attention to our positioning for when the inevitable recovery occurs.
As for the future, we continue to manage portfolios for the longer term. Global economies, valuations and geo-political considerations are constant factors that were relevant before Covid 19 and will remain thereafter. It is therefore important that any short term adjustments we make are proportionate and measured.”
|Paul Beasley ACII
Chief Executive Officer
|Richmond House Wealth Management