MLC Senior Economist Bob Cunneen speaks to MLC Portfolio Specialist Natalie Comino about softness in share markets, with the exception of Australia, impact of the coronavirus and the outlook for interest rates.
Natalie Comino: Welcome to this month's economic and market update. I'm Natalie Comino. I'm a Portfolio Specialist at MLC. And I'm joined by Bob Cunneen, our Senior Economist. Welcome, Bob.
Bob Cunneen: Thanks, Natalie.
Natalie Comino: Now, Bob, the coronavirus has been getting a lot of media attention this month. How have global share markets been reacting?
Bob Cunneen: Well, for January itself, global share markets, in terms of the local currency, actually fell about 0.6 per cent, and most of the negative response was in China. So China's share market fell about 5 per cent. And what we're seeing with the virus is that the risk so far has been concentrated in China. Tragically, we've had more than 500 deaths and 28,000 infections, but the majority of cases remain in China. However, it has been a concern to global markets, and you've seen falls in European shares. American shares have also responded negatively to this news.
Natalie Comino: How about fixed income markets?
Bob Cunneen: Well, they'd benefited because what we've seen is a very strong rally in global bonds, because they're seen as a defensive asset class. Investors, when they become more cautious about global shares, they typically allocate more money towards global bonds, just to ensure that they have some safety.
Natalie Comino: By the end of January, we saw the UK formally exit from the European Union. Did markets react at all?
Bob Cunneen: Not really in the sense of things, because bearing in mind that Brexit has been a three-year soap opera, if we could put it that way. And you've had the election of the new conservative government under Boris Johnson in the middle of December. And from that point of view in January, what we've seen is a recognition that Britain is going to exit the European union, but from January 31st when the formal exit occurs, up until we have a trade agreement with Europe itself, we still have a degree of uncertainty. So, Brexit is still with us.
Natalie Comino: How did Australian share markets fare during January?
Bob Cunneen: Australia was a real surprise because even though global share markets fell, Australian share markets rose about 5 per cent, and we had some extraordinary gains in some selective sectors. So, if you looked at the healthcare sector, it was up about 12 per cent, and some stocks like CSL (ASX:CSL) and ResMed (ASX:RMD) were up between 13 and 14 per cent. We even had an exceptional run in Woolworths (ASX:WOW). Woolworths were up about 16 per cent. So that was a great run and an extraordinary performance considering the backdrop with the coronavirus.
Natalie Comino: What do you think will be the challenges for the Australian economy going forward?
Bob Cunneen: Well, the Australian economy at the moment is really struggling -- in the sense that the consumer is reluctant to spend. So, if we looked at things like housing construction, or car sales, what we're seen over the past year in particular, they've been falling. Against that is that the labour market looks still solid. So, we're still generating jobs growth. And we've also seen a rise in house prices, because the Reserve Bank cut interest rates by 0.75 per cent last year.
So, it's a pretty mixed view on the Australian economy at the moment. But bearing in mind we've now had the bushfire crisis, we've now got the coronavirus, and that's going to have a severe impact on the Australian tourism industry. And that would indicate that there's significant downside risk to the Australian economy in the opening quarter of this year. So, we need to contemplate either further interest rate cuts or more budget stimulus by the Federal Government to support the Australian economy.
Natalie Comino: And what is the RBA focusing on?
Bob Cunneen: Well, the RBA indicated at its February meeting that they think that the Australian economy is at a gradual turning point -- as in, will get better. And they see that the Australian economy will grow above 2.5 per cent this year. Now, that's a rather optimistic view. So the market is still contemplating that the Reserve Bank will need to cut interest rates again. So, potentially we'll have to cut interest rates from 0.75 per cent down to 0.5 per cent some time this year.
Natalie Comino: Well, thank you for your insights, Bob.
Bob Cunneen: Thanks, Natalie.
Natalie Comino: And thank you for joining us.