The outbreak of the coronavirus in over 28 countries has sent shockwaves through global financial markets over the past fortnight with increasing levels of uncertainty and misinformation evident across a number of regions. While there are many unknowns regarding this outbreak, there is likely to be continued disruption to economic activity ahead, which is unlikely to subside until the outbreak is brought under control.
The impact of the coronavirus on equity markets is likely to be multi-faceted with the potential to impact earnings across a numbers of sectors over 2020. While Asian equity markets are likely to take the brunt of the initial impact, the effects are likely to be felt across global markets, noting that previous outbreaks over the last two decades have resulted in short–term equity market corrections within a range of 5-15%.
Implications on the Australian equity market
From an Australian equities perspective, we are likely to see earnings outlook downgrades across a number of sectors, at a time of elevated valuations and a sub-par growth outlook, particularly as we head into the February reporting season. While earnings across the Healthcare, Consumer Staples and Infrastructure sectors should be relatively immune to recent events, based on Lonsec’s initial estimates, 2020 earnings estimates for the Resources (Energy, Iron Ore and Copper), Tourism/Travel and Consumer Discretionary sectors are likely to see significant one-off earnings revisions, capturing the impact of the coronavirus outbreak and the recent bushfires across Australia. However, such downgrades are unlikely to impact the long-term investment thesis for most companies and should be regarded as short-term headwinds, reflecting a series of one-off unfortunate events.
Lonsec’s asset allocation views
From an asset allocation perspective, Lonsec’s multi-asset portfolios remain very well diversified with only a small direct exposure to Chinese equity and bond markets. Consequently, our current focus is on the flow on effects that a sustained slowdown in Chinese growth may have on the domestic growth outlook given our close trading ties. As previously noted, our valuation indicators for Australian equities remain elevated, making them susceptible to a pullback should Chinese authorities’ attempts to stabilise growth fail. We have maintained our slight underweight positions in both global and Australian equities for the time being, however continue to monitor events closely.
While there is a high degree of uncertainty regarding the coronavirus outbreak, Lonsec notes that this event does pose a long “tail risk” for global markets should the outbreak get out of hand. These factors make it a challenging period for investors, where factors other than fundamentals are having a material impact on the trajectory of markets. In such an environment, we believe selective valuation opportunities will present themselves for long-term investors, however ensuring that your portfolio is diversified will be very important in navigating an increasingly volatile market environment.