Financial markets are being rocked by the coronavirus scare, with share prices falling off a cliff, bond yields tanking to all-time lows and the economic sunshine under threat from recessionary clouds.
Leading economist Saul Eslake says “there is a very real possibility that Australia’s long run of continuous economic growth will come to an end and the March quarter will see negative economic growth.”
The figures look scary with Australia’s All Ordinaries share index collapsing from its all time peak of 7255.2 last Thursday to land at 6511 at Friday’s close.
That means it is down 10.4 per cent which is just over the level the market gurus describe as a ‘correction’.
It’s been a tough ride down with the market suffering its biggest weekly drop since the GFC in a week and losing $210 billion in value on Friday alone.
Wall Street crashed into its namesake, falling 11.9 per cent since February 20 while the US 10 year bond yield reached record lows of 1.29 per cent.
The falls in bond yields means that investors are prepared to accept a miniscule return just to have their money in a place they see as safe.
But just because the markets have fallen off a cliff doesn’t mean that it’s a good idea for you to follow.
“At some point common sense gives way and fear takes over- we’re seeing that at the moment,” said Erin Smith, associate professor in disaster and emergency response at Edith Cowan University.
While coronavirus is scary, “the fatality rate is only about 1 per cent, so the death rate is far below cancer, traffic accidents and suicide,” Dr Smith said.
Even if you tone down the medical terror there is still the reality of the markets to deal with. To date that hasn’t been as bad as a quick glance at the headlines would indicate.
Take stock, don’t panic
“Last year the stock market rose 18.4 per cent, the strongest performance in 10 years,” said Jessica Amir, market analyst with Bell Direct.
“The rise to this year’s peak was 6.2 per cent so the fall leaves you down only 3.3 per cent for the year and takes you back to where the market was last June.”
It has been hard to find a refuge from the storm with even gold and Bitcoin falling in value in the last couple of days despite their reputation as alternative stores of value.
The big question is ‘where to from here’? Fortunately there is a road map, with Ms Amir saying there have been 26 corrections on the ASX since World War II and “on average it takes four months to recover”.
If, however, things really go to custard and the market falls 20 per cent then we would be in bear market territory.
“There have been 12 bear markets since World War II with the most recent being in the GFC back in 2008,” Ms Amir said.
“Then the market takes from 15 months to two years to bounce back,” she said.
Governments and central banks, despite having let interest rates erode to virtually zero, still have some big artillery to roll out.
“China has taken some strong action on the monetary [interest rate] and fiscal [spending] side,” said Nicki Hutley, partner with Deloitte Access Economics.
Looking to China
The Chinese have a big job to do as coronavirus is “very likely to be much worse than SARS [which hit China in 2003] and the Chinese account for a much larger share of the global economy than they did then” said Sarah Hunter, economist with BIS Oxford Economics.
Measures like quarantining would disrupt supply chains and make the disruption greater, Ms Hunter said.
“The RBA will have to cut interest rates,” said Mr Eslake.
“I’m not sure they will do it next week but if not, they will in April.”
The government is also setting the scene for fiscal spending by raising the prospect of dropping the move back to surplus, he said.
While companies have been reporting business disruption to date the wider Australian economy has not been overly affected.
“In the property market there is no sign of a reduction in auction clearance rates,” Ms Hutley said.
So what should investors’ next moves be?
“If you’re a long term investor there’s no need to sell. If you have a super fund invested in a balanced option and are not close to retirement then you can sit tight because you have a diversified portfolio,” Ms Amir said.