After a strong 2019 in terms of returns, stock markets are adjusting to risks in the global economy, and in particular over the past few days, risks to the global economy posed by the Coronavirus (COVID-19) which up until last week, had been somewhat downplayed by markets.
Below we answer some questions our clients may be asking in relation to their investment portfolios:
- What has changed in the past few days?
It boils down to fears Coronavirus will become a pandemic, and the World Health Organisation (WHO), while resisting calls to call a pandemic already, has stated countries should be “in a phase of preparedness”. The key factor for markets is uncertainty, that is, we don’t yet know how severe it will be, nor do we know if the virus will spread to all continents, but it’s already spreading widely in China (death toll 2,663, total mainland cases at 77,658), South Korea, Italy, Iran and elsewhere — and thousands of undetected and infectious patients have been and continue to travel around the world.
- What is a Pandemic?
WHO states a pandemic is declared when a new disease for which people do not have immunity spreads around the world beyond expectations. There needs to be a second wave of infection from person to person throughout the community. In the US, the UK and Australia, there is no active community transmission at present. Once a pandemic is declared, it becomes more likely that community spread will eventually happen, and governments and health systems need to ensure they are prepared for this.
- What has been the effect on Markets so far?
Stocks have reduced slightly across the globe and bond prices have risen as worries mounted in the market over the virus. Industries directly affected have moved the most, for example, Airline and Travel providers. In the world’s largest market – U.S. stocks tumbled to an almost 12-week low on rising concern Coronavirus will upend global supply chains critical to economic growth.
Locally, the ASX 200 has erased the impressive gains it has made so far this year ending up where we were at the end of December and is currently trading at 6,736 at the time of writing. To put this in perspective, the ASX 200 returned 23.8% year to 31 Dec 2019 and the S&P500 (US market) returned around 33%.
- What should investors do?
The recent turbulence is a reminder of the types of market risks for which investors are compensated for over the long-term, and Endorphin believes investors that are able to see through the noise and stay committed to their long-term strategy will best weather the storm as markets resolve uncertainties and recover over time.
Considering the significant outperformance of equity markets over the course of the last year, it is not surprising to see a pull back in the face of growing uncertainties and we do not expect this to subside for a few months. US elections are then picking up pace and this will no doubt lead to more uncertainty and volatility ahead. We remind investors that such uncertainty is the flip-side to good returns from risk assets over time.
- Looking ahead!
While there has always been a strong focus on ‘Investment Governance’ (the structures and inputs that supports our decision making) at Endorphin Wealth, we have recently made the decision to strengthen our Investment decision making capabilities further by appointing an Advisory Investment Consultant to our Investment and Portfolio Construction Committees. Oreana (www.oreana.com) has operations across Asia and Australia and has been selected on the strength of their macro views and insights on the global economy, particularly Asia, which is a major focus and source of returns for Australian investors. In this role. Oreana, lead by Dr. Isaac Poole (former Chief Economist, NSW Treasury) will be delivering asset allocation and portfolio construction advice to improve portfolio outcomes and returns for Endorphin Wealth clients.
If you have any questions about your investments or the path that lays ahead, please get in contact with an advisor here at Endorphin Wealth.