This year’s Budget Speech occurred against the backdrop of a deep and sustained global equity sell-off as investors reacted to the rapid spread of the COVID-19 coronavirus worldwide. While generally well received, the market impact of the Budget was overshadowed by these global developments. It is a reminder that global matters more than local when it comes to investments.
Rapid spread, rapid selling
Losses on major global equity indices reached double digits in the space of only a few days, indicative of panicked selling, not reasoned portfolio repositioning. While the spread of the virus inside China appears to be slowing down, it is accelerating elsewhere in the world. The sharp rise in risk aversion is centred on fears on the spread of the coronavirus to many countries around the world – including Korea, Italy, Iran, Brazil and the US – and that the same draconian measures to contain the outbreak adopted in China will be applied elsewhere. These have been deeply disruptive to economic activity, impacting both demand and supply.
In other words, although the virus is deadly for around 3% of people infected (with most experiencing only relatively mild symptoms and making a full recovery), the economic shock is a result of the steps taken to halt its spread. It remains to be seen whether other countries will follow China’s lead and adopt large scale quarantines, business closures and travel bans. Imagine for instance the negative impact of cancelling the upcoming Tokyo Olympic Games.
Chart 1: Global equity indices rebased to 100
Source: Refinitiv Datastream
While each death is tragic, we tend to have a very skewed perception of risk during events such as these. Almost 3 000