Market Commentary – January 2020

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First of all, we would like to take the opportunity to wish you all a happy new year!

Throughout 2019, our updates sought to outline and discuss our prevailing view that, despite undeniable existence of several (potentially significant) headwinds, investors should remain cautiously optimistic about the medium to long term prospects for markets. This view is based on the thesis that Central Banks are likely to continue to maintain this low interest rate environment for some time which will, in turn, continue to support asset prices.

It was our intention to continue to build on this theme in our first update of 2020, however, the new decade welcomed us with some major adverse circumstances and it would be remiss of us not to address the impact (both human and economic) of these. We are of course referring to the horrendous bushfire season in Australia and the outbreak of the Novel Coronavirus in China.

Bushfire Season

This year’s bushfire season, starting in late 2019 and continuing into January 2020, is the worst on records, at least for New South Wales. It has caused countless stories of tragic personal, financial and ecological loss, the true scale of which we are yet to fully comprehend. Farming and tourism have been crippled in affected areas, compounding the devastating impact of the ongoing drought. Consumer confidence has been dented and major cities (such as Sydney and Melbourne) experienced increase health costs and lower productivity due to the heavy smoke haze.

As devastating as these circumstances are, and we do know of clients that were evacuated from their homes, you should not be concerned about your investments. Businesses that are likely to experience the most significant medium term impacts, including insurers and tourism operators, form a very small component of portfolios. None of our clients have direct exposure to agriculture, which is likely to be the hardest hit sector over the medium to long term.

In a general economic sense, although the fires are expected to have a immediate negative impact on the economy, once the clearing and rebuilding phase of this disaster starts, the new investment and expenditure is likely to support the economy in the medium term. The government has already committed more than $2bn to the rebuilding in addition to all of the investment from insurers as claims begin to be paid out. Somewhat perversely, this is likely to have a positive effect on the economy with many economists forecasting that the rebuilding efforts will add approximately 0.25% to GDP in 2020.

Novel Coronavirus (otherwise known as 2019-nCoV)

The Novel Coronavirus (Novel refers to the fact that this particular strain of the Coronavirus has not been seen before), which first broke out in the Chinese city of Wuhan, has continued to spread over international borders and markets have not been immune to its consequences.

Thus far, the majority of the 9,950 global cases of 2019-nCoV have been recorded in China, where more than 210 people have also died from the virus’ effects. Governments around the world have been watching the spread closely taking escalating actions (including many now ceasing flights to and from China) in an effort to contain the spread.

The economic impact on global growth could be significant, particularly in the short term. Since its last major health crisis in 2003 (SARS outbreak), China’s share of global economic output as quadrupled to around 17%. Back in 2003, SARS wiped about $40bn from the global economy. The impact of 2019-nCoV is already estimated to be $160bn, or around 4 times that of SARS.

How should investors respond?

These events have increased the likelihood that the RBA will further cut interest rates in the first half of 2020. This brings us back to our central thesis that the lower interest regime will continue to be supportive of asset prices. Indeed, the global economy, while not growing robustly, is still growing. Fueled by the ongoing low interest rate environment, Europe, Japan and Emerging Markets are showing signs of growth.

Furthermore, two of the main medium term drivers of market uncertainty and volatility, Brexit and the US-China trade war, have now been largely resolved. Boris Johnston’s clear win in the UK elections paved the way for the UK’s official exit from the EU which took effect from 31 January 2020. Further, Phase One of the US-China trade deal has been announced. No doubt the agreement will be trumpeted as the “greatest deal ever”, however, the reality is that it is little more than window dressing. The truly contentious issues have not been addressed, particularly the predatory pricing practices of Chinese state owned enterprises and the tit-for-tat tariffs remain in place. Nevertheless, it is a clear sign that the war is over (for now at least).

While we are not predicting the kind of spectacular returns seen in 2019, we see plenty of room for modest single-digit growth. Around the would unemployment continues to fall, bond yields are starting to rise and the US dollar appears to have peaked. Further, we are not seeing any evidence of the usual triggers of recession, namely: increasing inflation, increasing interest rates, overleverage or constricted lending to businesses.

While events like these explored in this update will inevitably cause short term volatility in markets, we see plenty of reasons why the medium to long term outlook remains cautiously optimistic. As such, our message to investors remains that it is important to focus on your long-term goals and not panic about any short term market wobbles.

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