March 2020 Newsletter
A letter from our Principal, Christoph Schnelle
The Australian share market and many world share markets fell by some 7% yesterday, Monday, March 9th. This is one of the worst single day falls in the last 100 years.
Curiously, the trigger was an oil price war between Russia and Saudi Arabia. These two countries, and other OPEC countries had an agreement to reduce oil production to keep oil prices up, but Russia decided not to extend that agreement. The youthful ruler of Saudi Arabia decided to take that as a challenge and now offers big discounts to those countries who traditionally bought oil from Russia, and Saudi Arabia will now increase production by as much as it can.
Most countries are oil importers, like Europe, China, Japan, India and many others – the US is roughly self-sufficient for oil now, and normally low oil prices are a boon to these economies. In other words, good news led to very unusually large losses on the share market. That is strange but it does happen from time to time where any major news is considered to be bad news, while at other times share markets rise when seemingly bad news is released.
However, for climate change activists, low oil prices are bad news, as they will extend the transition time to renewable energy. Since reducing greenhouse gases is now the aim of most people, low oil prices might be perceived as bad news for that reason.
This 7% loss has come after two weeks of substantial falls on the share market. Even with all these falls the Australian market is still up on the lows that we had at the very end of 2018 and very beginning of 2019. In other words, we had a very good 2019 but have given back most of those gains.
The main reasons for those falls was the Coronavirus which now looks as if it will go pandemic, i.e. seems to be spreading worldwide. The news here is still ambiguous. There is a chance that the spread can be slowed down through quarantine measures long enough that a vaccine or helpful anti-viral remedy might be found, but it is more likely now that the virus will spread throughout.
The impact of Coronavirus, COVID-19
This scientific paper just came out and shows that the virus infects people of all ages. The paper followed 391 infected people in Wuhan and looked at how these 391 people infected those around them. It showed that children get the illness as often as adults but that children usually have little or no symptoms and spread the illness further despite those minor or non-existing symptoms. It also shows that 15% of those who live or travel with infected people get the virus and 85% don’t. For those who are in lesser contact, the infection rate is about 3%.
The fact that the virus is often mild in children and young people is both good news and bad news. Good news because, unlike for example the Spanish Flu from 1918 or the annual flu, the new virus is much milder for most young people. Bad news because it means that the virus can spread undetected.
In other words, there are probably a large number of infected people in the community who think they only have a mild cold or similar. For older people and those with existing conditions, the Coronavirus can be bad news, though so far, the Coronavirus affects far fewer people than the flu.
It is mainly the Coronavirus quarantine measures and the associated economic disruption that affect the share market. Those who are affected most – the very old and those with pre-existing conditions like heart disease, diabetes, high blood pressure or chronic respiratory issues – tend to be working less or not all. Interestingly, Chinese exports only fell by 17% in February, a time where much of China was in lockdown.
I cannot say how the share market will develop in the short or medium term but there are no major economic reasons for these recent large falls, as the economic impact of the Coronavirus and low oil prices will ultimately have a relatively minor negative, or even positive economic impact. An exception would be a mutation in the virus that would make it much worse but that is a relatively unlikely outcome. This is very different to the global financial crisis in 2008 and 2009 where many banks in the world were essentially broke and had to be bailed out at great cost by their governments.
Hence, I personally actually bought shares on Monday afternoon as I consider prices to be low and throughout the last two weeks, I never had the feeling to sell mine or anybody else’s existing portfolios. That may be wrong, but it is not possible to predict the future and I like buying shares when they are cheap and hanging on to them at other times, as that has been the best practical strategy in the medium and long term for more than a century. Many of you are also partly protected as your portfolio contains fixed interest investments which have done very well so far in the last few weeks.
This link shows the Coronavirus cases for each country:
As always, please feel free to contact me if you have any questions. I wish everyone well during these volatile times.
AFP LRS Adv. Dip.FS (FP) EPA Acc. MBiostats
Life Risk Specialist
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