Monthly economic e-news – March 2020
16 March 2020
By Craig Turnbull
Chief Investment Officer.
Coronavirus and oil price war hit global markets
On the last day of 2019, several cases of an unusual pneumonia emerged in the Chinese city of Wuhan and from there the Coronavirus, or COVID-19, has rapidly spread around the world.
Investors held their nerve until late February when outbreaks in Europe and the Middle East sparked sharp falls across global markets, and this volatility has now been further exacerbated by an oil price war between Saudi Arabia and Russia.
Source: Yahoo Finance
What impact is the virus having on the Australian economy?
A number of key sectors have borne the immediate impact of the virus including travel, education, manufacturing and construction.
Travel bans and low passenger numbers have hit airlines hard with Qantas estimating that the impact of the virus outbreak on their bottom line to be as much as $150 million.
Around 190,000 Chinese students are currently enrolled in tertiary institutions in Australia so the travel bans will have a major impact on fee revenues across the education sector.
The closure of many Chinese factories disrupted global supply chains and many local manufacturers and construction companies have been forced to look for alternate suppliers for key components and materials.
On a positive note, BlueScope Steel has reported that its Chinese steel mills are back up and running at full capacity. The re-starting of steel production will be welcome news for Australian iron ore exporters.
However, the virus will have flow-on effects across the Australian economy and this has prompted the Federal Government to announce a $17 billion stimulus package. The measures include incentives to speed up investment, wage subsidies for apprentices, and cash payments to pensioners as well as small and medium businesses.
Why have global oil prices fallen so sharply?
Global oil prices have been falling on fears of the Coronavirus and a global recession. In response, Saudi Arabia requested the members of OPEC+ to cut production in a bid to stabilise the market.
OPEC+ is an alliance of 24 oil-producing countries including the OPEC members led by Saudi Arabia as well as a number of non-OPEC members led by Russia.
However, Russia has refused to introduce production cuts. Saudi Arabia retaliated by announcing substantial price cuts and an increase in Saudi oil production to more than 12 million barrels a day.
This escalation in tensions sent the Brent spot price for oil tumbling to below US$40 a barrel, down more than 30% since mid-February. This price fall is another hit to the already battered share prices of Australian energy companies such as Santos, Woodside and Oil Search.
The silver lining for Australians is that a falling global oil price should flow through to lower petrol prices at the pump. This would be a small but welcome stimulus for the economy in the current climate.
What will it mean for super returns?
The Coronavirus will have a tangible impact on our economy but at this stage it’s difficult to estimate the severity and the duration of this impact. It’s this uncertainty that is undermining investor confidence.
Global share markets have been extremely volatile since mid-February and this will adversely affect super returns in the short term particularly for investment options with a greater exposure to shares.
However, it’s important to remember that super is a long-term investment and there will be short-term volatility from time to time as the result of a wide range of factors.
So if you are concerned about your investment strategy, you should make an appointment to have a chat with your financial planner.
Markets at a glance
for the month ending 29 February 2020
Australian shares1 down by 7.69%
Australian Government Bonds yield2 down to 0.815%
Australian dollar down to US$0.6524
Cash rate3 steady to 0.75%*
International shares4 down by 8.53%
*RBA reduced the official cash rate to 0.50% on 3 March 2020
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)