Markets in a coronavirus world.
Drastic steps are being taken around the world to combat the spread of the Wuhan coronavirus, so how has this affected markets?
Since 20 January 2020 the main US share market index is down -2.3%, as of yesterday. The New Zealand share market is down -2.8% from its highs over the same time period.
The Chinese share market opened this last Monday after being closed for a week for the Chinese New Year celebrations and it fell nearly 8% on the day.
How has that affected our client's portfolios? A typical portfolio is down -1.9% since the last top on 20 January 2020. Quite a drop, but given the circumstances, not too bad, especially since the first half of January was so strong (up 1.6% for the first three weeks of 2020).
If we look a bit deeper into the various sectors, emerging market shares are down -6% in our currency even after having had a bit of help from a falling New Zealand dollar. Our world shares sector is down around -2.5% on average in our currency.
As you would expect, international fixed interest is up, by 1.6% over the past two weeks. When there is this kind of shock to world markets, interest rates fall and that makes the value of bonds go up. A nice little hedge.
Another typical reaction to shocks like this one is for money to flow to the safe-haven currencies like the US dollar and the Swiss frank, away from the more risky currencies like the New Zealand dollar.
The New Zealand dollar is down -2.2% against the USD since 20 January 2020 and this helps counteract the drop in global share markets when measured in our currency.
China is our biggest trading partner. It is the biggest trading partner for both Australia and the US as well. We are locked into China in a way that we weren't back during the SARS coronavirus outbreak in 2002/2003. New Zealand cannot escape this unharmed. It has already affected our two biggest exports, tourism and dairy.
China's share of world trade is 2.5 times bigger that it was in 2003.
From a business perspective, how bad can it get?
The experts (Harbour Asset Management) are telling us that the situation is very fluid and will worsen until the number of new cases starts dropping. At the moment they are going up.
Global commodity prices have fallen around 10% in the past two weeks, Dairy prices fell 4.7% overnight and oil has fallen around 20%.
As for financial markets, they will recover strongly only once the number of new cases has peaked, we suspect. Based on previous experience, experts think this could be a matter of weeks away.
Prior to the outbreak of this virus we were seeing a rebound in global economic activity. China, Europe and the US were all showing signs of a pick-up in business indicators. Although world growth will be revised down as a result of the virus outbreak, the silver lining is that it came at a time of economic renewal rather than economic weakness.
Clients have asked whether this is a good time to invest new money.
Is it a good time to invest new money, or, should one wait until it gets worse? That is very hard if not impossible to tell. If one waits and it gets better, markets go back up, you have lost a great opportunity to buy. Given that it is likely to get worse before it gets better there might be another couple of weeks breathing space into which to invest.
Still, a wise investment adviser once told me, "That the best time to invest is when you have the money." Another one said, "Don't try and catch a falling knife."
No matter which option you take, the best time to invest will be when you are feeling the most anxious about the state of the world. Once you start feeling better about things the markets have already beaten you to it and they are back on the way up. You missed it.
Keep asking great questions ...