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Global Update – written on the 28th of February 2020

As I’m sure you are aware with the various media reports on global stock markets, we are currently experiencing tough market conditions. 2019 had been a very good year for nearly every asset class on the whole, recovering fully from some of the difficult conditions seen at the tail end of 2018. But moving into 2020 and particularly this week, fears of the coronavirus and its effect on the global economy has led to large sell offs within equity investments.

The COVID-19 (or the Corona Virus) is the main contributor to the tough conditions mentioned above but as one commentator has quite rightly pointed out “People have gone from saying this is a non-event to saying this is the end of the world. There’s plenty of room for a middle ground.” As you’re aware, the virus has been especially prevalent in China, with numbers suggesting 78,000 to 82,000 cases being reported there. Last year, China formed nearly 30% of the worlds growth (GDP) and perhaps even more importantly, many countries rely on China for their growth due to the exports they sell to China. The virus has caused a mass shutdown in much of the manufacturing and transportation within/to/from China which will have a serious impact on Quarter 1 profits for many companies. This, accompanied with mass media scare mongering, has led to market falls.

Going forwards, most global authorities are viewing this as a temporary event, and some have already started supporting local businesses in order to help them through this period. For example, the Peoples Bank of China have lowered 1-year loan prime rates for companies and various government fees/charges to companies have been waived or delayed (such as company contributions to social security and medical insurance). This sort of ‘targeted relief’ (where governments look to ease short term costs to business’ to aid their cash balances with the drop in demand seen) should help ease some of the pain businesses are feeling once the hysteria is lifted. We hope, and expect, to see other national governments following suit.

Taking a more long term view, many global authorities will then seek to bring in fiscal support (government spending/tax cuts) once the virus has cleared in order to reignite growth in their economies, with China already planning such a package even before the virus rose to prominence. It is far too early, and too unpredictable in its nature, to assess the ultimate impact of the coronavirus on economic activity and corporate earnings. The sooner the virus is confidently contained, the quicker the recovery in economic activity will be, particularly given policy stimulus will no doubt be deployed to assist in that recovery. However, the more the virus affects activity in other regions, and the longer the period of reduced travel to restrict the transfer of the infection, the greater will be the impact on corporate earnings. For now, investors should maintain a balanced approach to asset allocation given the uncertain nature of the outbreak.

Written by Ian Maitland, Jack White & Robbie Holman

This article is for information only and should not be treated as advice. No action should be taken in respect of this article without independent financial advice. This information represents the opinion of Greenfields Financial Management Ltd. only.