INSIGHTS

ARE WE BEING TOO COMPLACENT ABOUT CORONAVIRUS?

Mark Lister, 24 February 2020

I’ve got the sneaking suspicion markets are a little too complacent when it comes to the potential impacts of the coronavirus (COVID-19) outbreak.

To be fair, there has been a reasonable reaction in recent days, with haven assets rallying on the back of the ongoing uncertainty.

Gold prices rose to a seven-year high; the US dollar is at its strongest level since early 2017 and the US 10-year Treasury yield fell to the lowest level since the middle of 2016.

Then again, sharemarkets in the US, Australia and New Zealand hit fresh record highs last week, and all have risen a spectacular 20 to 30 per cent over the past 12 months.


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We’re starting to see the outbreak find its way into some economic indicators. On Friday monthly PMIs were released for several major economies. As one of the first measures of February activity, these provided a good steer on just how much disruption coronavirus is causing.

The answers weren't encouraging. The Japanese PMI suffered its biggest fall in almost six years, raising the prospect of a technical recession in the world's third largest economy.

The US measure was also well below expectations, pointing to the first contraction in output since October 2013. A weaker services sector was a notable feature of the survey, while new export orders also declined.

Unsurprisingly, Australia looks set be caught in the crossfire too, with its PMI falling to the lowest in at least three years as respondents cited falling demand, poor weather (including the bushfires) and the virus as key worries.

Closer to home, tourism operator Skyline Enterprises said its tourism and restaurant operations in Queenstown and Rotorua have seen an overall drop in patronage of 12-15 per cent. Its accommodation businesses are still trading well, but March bookings suggest there is a quieter period ahead.

Not all New Zealand companies are facing challenges. Auckland Airport downgraded its earnings guidance only marginally, EBOS Group said it wasn’t seeing much impact, and Fisher & Paykel Healthcare is benefitting from rising Chinese demand for its products.

A plethora of corporates are scheduled to announce earnings over the coming days, so there will be more first-hand reports.

Among these are several China-facing businesses, such as Comvita, Scales, a2 Milk, Air New Zealand, Vista Group, Port of Tauranga and Tourism Holdings.

I don’t think we're looking at a full-blown derailment of the global economy on the back of COVID-19. While a global pandemic is certainly possible, it’s not the most likely scenario.

However, even if it is brought under control over the next month or two, we would be unwise to underestimate just how much it could dent economic growth, corporate earnings or share prices.

As more evidence comes to light about disruptions to economic activity and business operations, the greater the chance of a coronavirus-induced sell-off.

Investors might be wise to exercise a bit of caution over the next little while, just until we can figure out how long this piece of string is.

 

This article was also published in the NZ Herald on 23 Febreuary 2020 under the title of "Are we underestimating the impact of coronavirus?".