Although history tells us that health emergencies, such as the current coronavirus epidemic in China, are a continuing fact of life, their timing can be extremely difficult to predict. This irregularity, combined with the potential for profound market impacts, makes health emergencies a classic “Black Swan” event.
Since the new strain of coronavirus broke out in late December 31 in Wuhan, China, the severity of the epidemic has sent waves of uncertainty through global markets and it is unlikely we have seen the worst of it. From prior experience, we know that markets are unlikely to begin to recover from an health emergency such as this until the number of diagnosed cases reaches a peak and the full magnitude of the situation can be realised.
Given that current reports show than new cases are still increasing, we’ll have to wait for quarantine measures in China and the rest of the world to take hold before markets can be confident that calamity has passed.
Once this point is reached, it is estimated the Chinese economy will take a hit of about 2-3% over the March quarter, which would be followed by a rebound in the following quarter but it would still weaken annual growth. It’s anticipated the People's Bank of China and the Chinese Government will introduce stimulus measures in response, but until then the economy must brace for a hard knock for now.
Although the new coronavirus outbreak will provide some disruption in the short term, equity markets are still expected to return approximately 9-10% over 2020. That represents a slightly lower figure than for the previous twelve months, however the bottom line is that the outlook for markets and the global economy in general remains positive.
This is largely thanks to a recovery in the manufacturing sector driving stronger economic conditions in Europe and the expectation that the US will continue to perform strongly. So although the coronavirus emergency is putting a dent in prospects for the short term, the outlook for the rest of the year is much brighter.
Subscribe below to SMSF News to receive my latest articlesDiana Mousina, Senior Economist
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