Global economy rattled by coronavirus

Highlights

  • The coronavirus is having a severe impact on global markets, causing volatility in the Australian share market.
  • Global economies watch and wait

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Markets searching for certainty

The coronavirus has triggered a large shift in investor sentiment. Until mid-January, investors were extremely optimistic, with share markets reaching highs not seen for several years.

But the problem for global markets is that investors like certainty.

Reports about the coronavirus, and a subsequent World Health Organisation upgrade to a public health emergency on 30 January 2020, sparked international concern and uncertainty returned.

Global economies watch and wait

Investors and governments are trying to predict the impact the coronavirus is likely to have on the global economy given that it’s impacting a country as big and central to global trade as China.

At the start of 2020 many global economists predicted a positive year, driven by emerging market countries like Brazil, Russia, India and China (BRICs). But Morgan Stanley economists now suggest the virus could reduce first quarter Chinese GDP growth between 0.5% and 1%. If current events do slow China’s GDP growth, there’s a risk of that this will have follow-on effects for other countries.

The Australia / China relationship

Australia has close trade links to China in the commodities, tourism and education sectors, so a slowdown of that magnitude could have a significant impact. Our Government has warned of a possible hit to the Australian economy in the first and/or second quarter of the year, presenting a further risk to economic growth following the effect of the bushfires over summer.

Other economic impacts may include consumer confidence, manufacturing supply chains and travel / tourism.

Riding out the ups and downs

While market downturns and short-term volatility may impact on your short to mid-term superannuation account balance, they’re a regular part of investment cycles.

“First State Super works to continuously monitor and manage our investment options. We actively manage all global market moves on our portfolios,” said Damian Graham, our Chief Investment Officer.

If your super is invested in a pre-mixed investment option, the level of volatility will depend on its exposure to shares. Each has minimal direct exposure to China and is well diversified by asset class, sector and geographical region, which helps mitigate the full impact of such global events.

Our investment performance to 31 January 2020

View our investment returns

Investment commentary

All premixed options delivered strong positive returns in January due to positive returns across both global equity and fixed income markets.

Australian fixed income performed well in January as investors sought safe havens due to an increase in downside risks from the heightened tensions between Iran and the USA in early January and the outbreak of the Novel Coronavirus in China in the latter half of the month.

Global equities moved lower in their local currencies over January due to concerns on the global impact of the Novel Coronavirus outbreak in China. However, the fall in the international equity indices was offset by the depreciation in the AUD, resulting in positive return contributions from global equities across all options.

Australian equities delivered strong returns in January, outperforming global equities. The easing in global geopolitical risks, particularly with the signing of the US and China trade deal, and the dovish stance of the RBA on rates supported Australian equities prices through January as well as falling AUD.

Past performance is not a reliable indicator of future performance. This information has been prepared by First State Super Investments on behalf of FSS Trustee Corporation ABN 11 118 202 672 AFSL 293340, trustee of the First State Superannuation Scheme ABN 53 226 460 365.