The retreat to safety and expectations for more monetary easing saw bond yields fall to new record lows in the US and Australia. Commodity prices also fell as did the Australian dollar although this was limited by a fall in the US dollar. At one point the A$ fell to US$0.6434, but managed to end the week at US$0.65. The plunge in the A$ by making Australia more competitive internationally will act as a shock absorber for the blow to exports from the coronavirus outbreak.

 

The news on coronavirus got worse over the last week as it has spread globally - with cases now reported in more than 50 countries. The daily number of new cases outside China now exceeds the daily number of new cases in China raising the threat of a more broad-based disruption to global economic activity well beyond China. Although new cases may have slowed in Japan and Singapore they continued to surge in Italy, Korea and Iran.

 

But with no sign yet of a peak in the number of new cases outside China, and a high risk of more cases popping up in the US and Australia, uncertainty remains high including in relation to the hit to global growth. So, share markets could still fall further in the short term. But here are several points are worth noting.

 

•First, share markets were already at risk of a correction given the strong gains from their last greater than 5% fall into August last year and coronavirus has clearly provided a trigger and explains its severity.

•Second, from a purely technical point of view it’s premature to conclude we have hit bottom yet – but markets are very oversold, the US share market managed to bounce off technical support from August lows on Friday, the VIX (or fear) index has spiked to levels last seen at the time of the last major fall in share markets into December 2018 (when US shares fell 20% and Australian shares fell 14%) and put/call ratios have spiked higher. So, we may be getting close to the capitulation by investors often seen at market bottoms.

•Third, the experience of the Chinese share market is instructive. It fell 12% to its early February low and before turning up again as the number of new cases in China peaked, all of which sounds like what happened around SARS.

•Fourth, share markets are now better value given the 10% or so plunge in prices and the plunge in bond yields. Valuations are no guide to short term timing but when they are attractive, they tell you there is rising potential for a rebound.

•Finally, policy stimulus is ramping up beyond China with fiscal easing in HK and Singapore Australia and the US and talk of more in Europe.

 

The bottom line is that share markets face significant uncertainty in the short term and remain at high risk of more downside given the unknowns around Covid-19. But we continue to see it as part of a correction in a broader bull market. Key to watch for a bottoming and the eventual rebound are signs of a peak in new cases outside China, even stronger indicators of extreme negative investor sentiment (as that’s when markets normally bottom) and more policy stimulus.

 

The December half profit reporting season is now wrapped up and while better than feared it was a bit mixed and the share market reaction in the last week was overwhelmed by global coronavirus concerns. The good news was that more companies saw profits rise than fall, dividends are strong, guidance was generally good and consensus expectations remain for modest profit growth this year. Against this though only 53% of companies saw profits rise which is the lowest since 2009, the proportion of companies surprising on the upside was only 38% which is lower than the norm of 44% and only 50% of companies raised dividends which is below the long-term norm of 62%. Several companies issued profit downgrades related to the impact of coronavirus. Reflecting the mixed results overall, the proportion of companies seeing their shares outperform the market versus underperform on the day they reported came in at 51% to 49% which was the same as in the August reporting season. Consensus earnings growth expectations for 2019-20 fell from 3% to 2.3% due mainly to weaker than expected resources profit growth. Earnings growth is strongest in tech, telcos, general industrials and REITS and weakest amongst utilities, media and insurers.

 

We expect to see further volatility over the coming months until there is a better understanding of the longevity and impact of the Corona virus.

 

 

Important note: While every care has been taken in the preparation of this document, Farrow Hughes Mulcahy make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.