Monthly economic update with MLC, March 2020

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen discusses the ongoing impact of the coronavirus on markets including central bank and government measures.

Why did global share markets fall so dramatically in March?

Global share markets reacted dramatically to the outbreak of the coronavirus. The rapid spread of infections, and the high mortality rate caused concerns about the global health systems, as well as the global economy. In terms of the global economy, the virus outbreak has generated concerns that we are in a global recession, and with that, downside risks to corporate profits and employment. Because of that, we've seen very dramatic falls across the world. In the case of the global share market, the MSCI index was down around 13% for March.

How did USA markets perform with the virus spreading?

Wall Street had a very turbulent performance in March. In the space of 16 trading days, the S&P 500 benchmark index fell nearly 24%. Since then, the market has recovered and the S&P 500 was only down around 12% for March itself. And what helped that recovery was that the American Central Bank dramatically cut interest rates by 1.5% in March. We also saw an aggressive budget stimulus package passed by Congress and the American President, of approximately 2 trillion American dollars or circa 10% of nominal GDP. So that has helped the share market recover in the United States.

How did Australian shares perform, given falling oil prices and the stay at home advice?

Australia's share market was badly affected by the coronavirus outbreak, as well as the fall in oil prices. With the fall in oil prices from $50 a barrel, in American dollar terms, towards $20 a barrel, what we saw is Australia's status as the world's largest liquid natural gas exporter, as well as coal exporter. This had a material impact on the perception of the Australian share market by global investors.

We also saw very sharp falls in Australian real estate investment trusts, which fell about 34%. Now the concern is, with the government recommending that you stay at home, employees not attending their office and also not spending at retail shops, this has had a very negative impact on Australian REITs.

Are there any hopeful signs that a recovery is on the horizon?

There are some early positive signs that the coronavirus outbreak, in terms of the number of new infections, is starting to peak. And we see those positive signs particularly in Western Europe. So in the case of Italy, Spain, and France. However, we are yet to see that case in particular with the United States. When the market sees that, on a global basis, that the peak in new infections is occurring, and bearing in mind that share markets anticipate the future, then global share markets should be poised for a strong recovery.

And finally, what should investors do given the sharp market losses and high volatility?

These are very dramatic events we are now experiencing, and it's important that investors focus on their long-term strategy. We all need to stay calm and to stay diversified, and we also need to realise that suddenly switching to cash out of growth assets, whether they be shares or property, runs the risk that you will miss the recovery. So bearing that in mind, it's important that we stay focused on the longer term, and try and absorb this dramatic shock with the coronavirus.

Thank you for your time, and stay safe.