Economics & Markets

Impact of Covid-19

By AMP Capital

Covid-19 continues to cause considerable human, economic and financial harm.  

In our PortfolioWatch webinar just a few days ago we highlighted two possible pathways for the virus to play out. The first scenario was a ‘quick containment’ with a short-term hit to growth, followed by a quick rebound with equities rallying once it is clear there has been a peak in the number of new cases.

The second scenario was for a ‘prolonged outbreak’ which could turn into a global epidemic, shutting down parts of the global economy for a longer period of time, causing a much deeper hit to economic growth and a sharper decline in equity markets.

Indeed, it’s the second scenario that seems to be gaining the upper hand as the news on Covid-19 got worse over the last week. The virus is spreading 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 increasing the threat of a more broad-based disruption to global economic activity. 

At the same time, recent news from China indicates that efforts to contain the spread of the virus can be successful. However, developed economies lack the ability to take the same hard-line containment measures China has adopted, though they are probably better resourced medically to combat an outbreak.

Financial markets have reacted badly to the evolving crisis. Equity markets are sharply lower and bond yields have rallied as the uncertainty around the spread of the virus and the harm to economic activity has increased. The New Zealand dollar, a renowned 'risk-off' currency, has also fallen sharply. 

Global equity markets are well into correction territory, with US shares down 12.8% from their recent highs, while Eurozone shares have fallen 15.8% and Japanese shares have declined 12.2%. The New Zealand market is down 9.6% from its recent peak.

Global share markets were already at risk of a reset given the outstanding gains made in 2019 with the MSCI World Index finishing the year 27.3% higher. Before the Covid-19 outbreak, equity markets were hitting new record highs with the US market returning its largest annual gain since 2013. Until we see a peak in the number of new cases outside China, equity markets will continue to come under downward pressure, and policy makers, including central banks, will come under increasing pressure to act decisively.

Expectations are building that central banks may act soon. Chinese authorities are already acting with more fiscal measures likely. On Friday night (NZT) the Chairman of the US Federal Reserve, Jay Powell, signalled that “the coronavirus poses evolving risks” which the Fed is “closely monitoring” and that they “will use our tools and act as appropriate”.

The problem for central banks is they can’t influence the economic disruption that is borne of broken global supply chains, but they can help ease some of the tightening in financial conditions.

In New Zealand, the impact of Covid-19 is being felt through key export markets. This is occurring at the same time the economy is feeling the effects of a severe drought. March quarter GDP looks likely to come in close to zero. The RBNZ is arguing that rate cuts are not suitable for a virus outbreak, nor for a drought. However, given the implications for economic growth, we think they will eventually come to the party and possibly as early as March.

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Important notes

This blog post has been prepared to provide general information and does not constitute financial advice in accordance with the Financial Markets Conduct Act 2013. An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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