Investment Update: Coronavirus

investment strategy

The spread of coronavirus outside China has rattled equity markets, but what is the impact for the Australian economy?

By

Paul Ashworth, Managing Partner
David Clark, Director
Tristan Bowman, Director


Posted 27 February 20

The spread of coronavirus outside China has rattled equity markets, but what is the impact for the Australian economy?

Coronavirus and Contagion Risk

Coronavirus has gripped the media since going worldwide in January 2020, but what impact is it having locally?

The virus has spread to 37 countries across the globe but so far, the number of cases (and deaths) has been largely concentrated to China as shown in the map below.

Coronavirus Cases, as at 25 February 2020

Diagram showing Coronavirus Cases, as at 25 February 2020

This concentration has meant the economic impact has largely been felt by China, for now, but is beginning to spread. The official data out of China hasn’t shown a large change yet but how accurate that is, is anyone’s guess. Raw data such as coal consumption or daily commuter trips would suggest otherwise, as would anecdotal stories of factory closures.

Supply Chain

Globalisation has allowed countries to specialise: Australia are world-leaders in digging dirt; China in manufacturing. With that comes intricate supply chains which are linked across borders as countries become reliant on others for supply of goods and services. The old saying was when China sneezes, Asia catches a cold. Now when China sneezes, the world catches a cold.

  • Exports from Australia: The value of Australia’s iron ore and coal exports to China is estimated at $120 billion a year and is about 6% of GDP. Indices which track imports into China estimate a 40% decrease in dry cargo volume (iron ore, coal) from January to February whilst export numbers from Australia have also taken a hit.
  • Imports from China: Import-reliant businesses such as clothing and apparel, finished goods and building materials are relying on inventory levels to get them through until Chinese ports open up. Until then, it’s a waiting game.

Likewise imports from other manufacturing-based countries will begin to feel the stress: in FY2019 Bangladesh imported US$1.16 billion of cotton yarn from China, in FY2020 this is estimated to drop to US$580 million due to restrictions in shipping. Similar impacts will be seen in pharmaceutical manufacturing given China’s exports of medicine input ingredients. These secondary effects will take longer to see but will flow through at some point as businesses struggle to restock.

Airline Travel

On any given day in China, you could expect to see close to 13,000 flights crisscrossing the skies. In mid-February, this number dropped to 1,600 flights due the impact of flight cancellations. Likewise, the number of flights leaving China dropped from 2,000 per day to 350.

The impact will be felt far and wide: Chinese residents spend USD $277 billion abroad, nearly twice as much as those from the United States. Australia is in receipt of about A$12 billion of that and the travel ban will last at least four weeks to 29 February as we go to print (and may well be extended).

Healthcare Systems

The response from the Chinese government and the medical system has been widely discussed and criticised: hospitals were overcrowded and the response was chaotic, perhaps leading to a quicker spread of the virus. The pressure on the Chinese healthcare system was enormous as new hospitals were needed to be built to house patients.

If a pandemic is declared, there will be great difficulty finding the hospital bedspace for patients even in countries with world-class healthcare systems. In the UK, the National Health Service has 142,000 beds and based on modelling of a worse case scenario of 50% of the population catching the virus, somewhere between 300,000 to 1.2 million people would be admitted to hospital at some point. This is in addition to regular bed needs.

Domestic Impacts: Fire & Biblical Plagues

A record-breaking, twenty-seven year run of uninterrupted economic growth is set to be tested by the concurrent impacts of bushfires and a viral pandemic. So far, the impacts have been isolated to China, with global equity markets only just reacting to the potential risks of an escalation in infection rates.

For domestic investors, it’s a case of some sectors being more impacted that others, we have outlined the likely impacts in the table below.

Coronavirus Impacts by Sector

Diagram showing Coronavirus Impacts by Sector

Government

Long-held ambitions of a government surplus are now under pressure. Government receipts will be stressed as we see lower:

  • GST receipts from a decline in consumer spending from tourists and students
  • Income tax receipts
  • Passenger movement charges
  • Commodity royalties

Tipping Point

Continued uncertainty into the second quarter of the calendar year represents a potential tipping point for equity markets. Thus far, all the adverse impacts of the bushfires and the virus have been contained to the first quarter data, enabling participants to write-off the losses as a short-term aberration.

A SARS level impact on net exports (-0.25%) combined with weaker domestic spending and bushfire losses, means that 1 or 2 quarters of negative growth are possible. However, we will be watching employment data to decide if this is a (largely) meaningless technical recession or a deeper, self-perpetuation downturn.

We continue to monitor the situation but as the moment we see the following effects:

  • Softer employment numbers in education and tourism industries
  • Quicker reaction by the RBA to reduce interest rates – currently a 50% chance to cut by June 2020
  • Reduced demand for iron ore and other commodities
  • Further depreciation of the Australian dollar

…all of which increase the chances of a recession in 2020.

Peace of Mind Investing

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the center of our business.

For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.