The new decade may have taken-off, but the early stages of the journey have not been without turbulence.
Largely fuelled by optimism surrounding a pick-up in global growth, the Australian share market rallied very strongly in January (up to 6 or 7% at its peak), despite the uncertainty circulating around the full impact the bushfires will have on the Australian economy.
However, the market has since come down as the effects of the fires began to hit home in certain sectors and tensions in the Middle East threatened to boil over. Oil prices spiked as a result, only to fall back to earth again, and energy stocks enjoyed a wild ride in the interim.
Since the outbreak of coronavirus, there has been also been a large amount of ambiguity and speculation around what the crisis will mean for the global economy as well as here locally, with share markets suffering to various degrees around the world.
Asian markets have taken the biggest hit off the back of the new coronavirus, with the outbreak first reported in Wuhan, China and most cases of the virus contracted to date having been reported there. Although far fewer cases have been reported outside of China there will still be a significant negative global economic impact due to disruption in China and global travel.
Until the full extent of coronavirus is known and the number of new cases decisively peaks, it is unclear when markets will start to sustainably trend up.
February reporting season is underway in Australia and the consensus is that earnings growth will likely be around 3% this financial year, which will provide some support for the local market. As the media continues to cover the more dramatic issues unfolding overseas, it might pay to bear in mind that these events come against this backdrop of earnings growth, as well as the prospect of lower interest rates which provide a positive backdrop for markets.
Looking ahead, it’s probable the share market will end the year on a strong note with reasonable returns, although they might not be as robust as last year. We need to remember that the market rallied strongly through 2019, and finally reached a point where it was overbought and vulnerable to a correction. We’ve since had some correction, triggered by the coronavirus outbreak. Provided that the crisis doesn’t continue to escalate, and that the number of new cases reaches a peak soon, we might expect to see a rebound along the lines of the one that followed the SARS epidemic of 2003.
We’ll keep a close eye on the way the new coronavirus is tracking but, if all goes well, expect a smoother flight through the rest of 2020.
Subscribe below to SMSF News to receive my latest articlesDr Shane Oliver, Head of Investment Strategy & Chief Economist
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