Themes For February

It seems an eternity ago but equity markets around the world reached record levels in mid-February, only to fall dramatically as a consequence of the global spread of COVID-19, better known as the coronavirus. This is classic “Black Swan” event, meaning it was impossible to predict and took markets completely by surprise. Hopes of geographically containing the spread of the virus have been dashed with the WHO now declaring the virus a global pandemic, as there are now very few corners of the globe not affected. Attempts to quarantine affected areas have been met with only limited success in slowing the spread of the virus. Global manufacturing supply lines have been severely disrupted and a growing sense of panic is severely impacting consumption activity.

The market reaction to this event has sparked volatility not seen since the onset of the GFC in 2008, with equity markets falling close to 20% from their February highs and a flight to security pushing government bond yields to all-time lows. Credit spreads have widened as a consequence of tightening corporate liquidity, especially in the energy sector. The reality is that it is impossible to forecast with any degree of certainty how the market will react in the short term as fear and panic is dominating market behaviour.


Oil price war

Adding fuel to the fire, the Saudis have fallen out with Russia on supply quotas and have chosen to exploit the market chaos by igniting an oil price war in an attempt to win market share. With demand severely curtailed by the impact of the coronavirus, the Saudis (who have the lowest cost of production) have flooded the global oil market, sparking an intra-day fall of 31% in early March. At these low prices, much of global supply is uneconomic, especially US shale oil production which has been a thorn in the side of OPEC and Russia for some time now. While cheap fuel is usually good for consumers and industry, there is little demand at any price currently and the profitability of producers will be severely hit.

Policy response

Policy makers around the world have responded with interest rate cuts, liquidity support, talks of fiscal stimulus and possibly even subsidies to industries hardest hit. While this will help cushion market sentiment, the reality is it will have limited impact until the public’s fear about the spread of the virus begins to subside. This is essentially a “supply” problem so measures to stimulate “demand” will have a muted economic impact until supply factors are resolved.

Where to from here?

It is fair to say that while we have seen pandemics before, the scale and breadth of this event is unprecedented. In 2003, the SARS outbreak caused a negative market reaction for a few months followed by a fairly swift recovery. While the coronavirus is not as deadly as SARS or Ebola, it is much more contagious. While it is impossible to say how long it will take to contain the spread of the virus, history tells us that it will eventually run its course. We have already seen a decline in the rate of infection in China, although global cases continue to accelerate. At some point, containment measures and better public education on hygiene will see a similar deceleration in new cases emerge. It is also possible that the onset of the northern hemisphere summer will help as was the case with the SARS virus. A vaccine will ultimately be produced but not for some months.


The market’s reaction reflects the fact that it is simply impossible to forecast the impact on the global economy and corporate profits which is fuelling wild speculation. While it is possible that the world is currently in recession, we do know that at some point the negative economic impacts we are now experiencing will reverse and markets will positively respond as a result. The economic stimulus measures that central banks and governments are injecting at present will serve to boost demand at a time when supply factors have reversed, which should underwrite an economic bounce back. It is important to emphasise that the benefits of this will only accrue to investors that hold their nerve and stay in the market.

Investment Outlook

In times like this it is imperative to remain calm and look past the negative sentiment that is so pervasive in the financial press and in social media. For investors with a genuine medium to long term time frame, the best course of action is to sit tight and ride out the current volatility until a calmer and more rationale market returns – which it inevitably will. Panic selling now just crystallises a loss and serves no rational purpose.

With market volatility so high, tactical trading is highly risky and unlikely to be rewarded. Fortunately, our multi-asset portfolios were fairly conservatively invested in equities at the onset of this event. Given the magnitude of equity falls to date, we took advantage of market weakness and added marginally to international equity positions. Holdings in Australian and US government bonds, as well as foreign currency exposure, have provided some downside protection. Rest assured, we are monitoring the situation very carefully and as always will act in your best financial interest.