The death toll may be rising, and more people in more countries are being infected, but for now at least, share markets are looking past coronavirus to a bright 2020.
- Markets are coming back to life after getting to grips with the spread of coronavirus
- The US and China are pumping money into their economies
- The risk of a market correction is increasing
It has been a rough couple of weeks as markets have come to grips with what the virus may mean for global economic growth and, in particular, companies that do business with China.
For example, iron ore miner Fortescue Metals is off 12 per cent, while Qantas, Crown Casino and A-2 Milk are down 9 per cent.
Health products company Blackmores is benefiting though, as investors predict people will flock to its products to try to protect themselves.
Blackmores shares are up more than 2 per cent.
“The biggest issue the coronavirus provides to the market is uncertainty, and we all know that the stock market hates uncertainty,” RBC head of equities Karen Jorritsma told the ABC.
But uncertainty, it seems, only lasts so long.
This week, markets have come back to life, continuing the upward momentum which has been turbocharged by the US Federal Reserve resuming a de facto form of quantitative easing last September.
Some investors nervous about coronavirus
Even the Chinese stock market is back, adding 1.3 per cent on Tuesday after the Government in Beijing announced it had pumped more than $100 billion into the country’s banking system.
The economic fallout globally from the coronavirus will be far worse than SARS now that China is so critical to the global, and especially Australian, economy, writes Ian Verrender.
In Washington, the Fed has poured about half a trillion dollars into the US economy, money which, in an environment of ultra-low interest rates, is flooding into the stock market.
At one point the S&P 500 index had risen 12 per cent since September. The Australian market was up 5 per cent.
Even after the coronavirus hit, the S&P 500 was still up 11 per cent in that period. The ASX200 was up 5.5 per cent.
“Often there’s a strength in the market in December, which people refer to as the Santa rally, and this year it’s just kept on going,” explained Kaye Rees, who, with some of her friends, runs an investing club in Geelong known as Trading for Blondes.
Ms Rees and her colleagues have been trading shares for 20 years.
She was pleasantly surprised as that Santa rally saw the Australian market hit a record high on January 9, then roar past 7,000 points on the 16th, for a gain at one point of 7 per cent since the start of the year.
But unlike many professional investors who drive the market, the coronavirus has made Ms Rees very cautious.
“Before the scare became really evident and started to quickly affect the market, I was definitely all guns blazing ready to buy, and now I’ve put the money back in the pocket,” Ms Rees said.
Trump wants US economy to perform in election year
Whether the impact of coronavirus on stock markets really is over no-one knows.
But there is one powerful force investors are banking on to counter any ill effects.
In the United States, 2020 is an election year and President Donald Trump will be very keen to have the US economy performing as strongly as possible to help his chances of staying in the White House.
On that theme, Mr Trump used yesterday’s State of the Union address to tell his supporters “the best is yet to come”.
“It’s well flagged that President Trump uses the S&P 500 as the marker rather than the polls and I suspect heading into this next election he’s going to be absolutely motivated to achieve a great outcome for the market,” RBC Capital Markets’ Karen Jorritsma said.
“He’s [Mr Trump’s] known to be very business friendly.”
Ms Jorritsma is tipping an already-overheated stock market to be about 7 per cent higher by the end of the year.
Sydney based independent financial adviser Tim Mackay, from Quantum Financial, shares that optimism, for the near term at least.
“Certainly I think there’s enough strength in the economy — the US consumer, the lagged effect of the interest rate cuts in the US,” Mr Mackay explained.
“There’s enough there probably that will keep the American economy going, and the Australian economy going, at least for the next six months or so.”
Investors urged to ‘be careful’
With stock markets already elevated, the risks of a correction are increasing. That is even without surprises like coronavirus.
Tim Mackay said he was telling his clients to be careful.
“If they’re balanced investors (50 per cent defensive, 50 per cent growth), if they’re worried about the market, perhaps they should go overweight on the defensive side,” Mr Mackay said.
“Of if they are even growth investors (70-30 or 80-20), perhaps have an overweighting to their defensive investments.”
Even more pressing for stock markets than coronavirus is the company reporting season now underway in Australia and the US.
With markets so hot, those who disappoint, like Treasury Wine Estates, are being punished.
Its shares plummeted 29 per cent after it flagged an earnings downgrade.