Thursday 20 February 2020

Still waiting to see COVID-19 economic impacts

The spread of corona virus in China appears to be restrained to about 1,500-2,500 new cases per day, with the proviso that the 'one off' spike in cases when 'diagnostic' cases were added to the total (which previously only included cases confirmed by clinical testing) seems a bit odd. It might suggest that there are capacity constraints affecting the testing all the possible COVID-19 cases (after all, to be detecting 2,000 cases per day you would have to be processing a massive number of samples), in which case there could be considerable under reporting. The other proviso is that the current figures are those that occurred due to transmissions during the 'lock down' period prior to 15 Feb. Now that China is again shifting attention/emphasis to getting Chinese industry 'back to work', there is a risk that the rate of spread may start to increase again (but this wouldn't show up in the case numbers during the 7-14 day incubation period, so this won't be apparent in the daily WHO SITEREPs for another week or so). An unward spike in new cases by the end of next week would be a very bad sign.

Outside of China reported cases are still low, but increasing. A lot of this is due to the cruise ship contagion, but the new cases detected in Japan, Korea and the Philippines are a worry, as is the lack of believable cases numbers for Indonesia. The global situation will probably become clearer by the end of March.

The equity markets appear to still be largely discounting/ignoring the potential economic impact of COVID-19 (increased volatility, but no panic so far), so for the moment my decision to shift investments to a more conservative asset allocation appears premature. Then again, markets can drop rapidly if/when sentiment turns, so for the moment I'm still quite happy to 'sit on the sidelines' until the full economic impact of COVID-19 becomes clear. Either it will be a 'one quarter' hit to Chinese economic growth, and a minor blip in global GDP, or it will continue to affect the Chinese economy in the second quarter, and there will be flow-on economic effects around the globe. Given the constrained ability of many developed economies to provide further economic stimulus (large deficits and low interest rates still left over from the GFC response) that could be problematic.

Timing the markets is never easy - which is why I generally avoid it. Only with the benefit of hindsight (in a year or two) will I know if I made the right decision. But it is unusual for a potential financial crisis to provide sufficient advance warning to have an opportunity to 'tilt' ones asset allocation away from risk before the markets have reacted, so a decision had to be made. A decision to assume 'all will be well' and do nothing is still a decision. And my lesson from the GFC was that things can be going bad behind the scenes even while everything seems fine, and that it can take 6 months or more for the 'turning point' to become apparent (by which time it is too late to do anything).

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