Why Aussie shares have seemed immune to coronavirus fears
You’d think that fears of global pandemic caused by coronavirus would be bad for shares, but Aussie stocks and global markets have pressed ahead. That could be a dangerous sign.
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A deadly virus is sweeping across the planet, our biggest trading partner China is effectively shut down, and the World Health Organisation has declared it an “international public health emergency”.
As protective face masks sell out everywhere, Australia’s sharemarket appears almost immune to this virus fear and is staying strong.
Since January 1 Aussie shares have climbed almost 5 per cent, despite a mild pullback of about 2 per cent in recent weeks. That can hardly be called a panic, and it’s easy to argue our market could have retreated anyway after its big surge in early January.
Other sharemarkets tell similar stories: a bit of a cold but nothing like a deadly virus. Markets in the US, Britain, Europe, Japan, Canada and New Zealand are generally flat or positive since the start of 2020, and all are significantly higher than they were six months ago.
All this relative strength comes at a time when China is warning that its economic growth will suffer and some analysts tip its annual growth dropping by one third, from 6 per cent to 4 per cent.
AMP Capital Investors chief economist Shane Oliver said last week if the coronavirus escalated into a global pandemic and was not contained until mid-year, sharemarkets could slump 20 per cent and there could be a global recession. It could also bring an Australian recession for the first time in almost 30 years.
However, Dr Oliver said that scenario was much less likely than the virus being contained within the next month or two and economic growth taking only a slight hit.
There’s a heap of uncertainty surrounding the spread of coronavirus and the fear it’s sparking in communities everywhere.
I think our sharemarket’s relative immunity to it all reflects a different kind of fear – fear of missing out, and that could lead to future sharp falls.
Investors have been piling into Aussie stocks, pushing our share prices up to levels that rank our stockmarket among the most expensive in the world, because they don’t want to miss out on juicy profits.
High dividends paid by Australian companies in an ultra-low interest rate environment is another big incentive to buy shares, but they won’t protect investors if the virus escalates and shares tank.
It’s no point pocketing a 5 per cent dividend yield on your investment if its market value drops 20 per cent. You’re still down 15 per cent and would have been better off earning 1-2 per cent from cash in the bank.
However, it can be just as dangerous to panic sell your share portfolio now in case the virus gets halted quickly like most other global virus scares in the past 20 years.
Investors have been burnt just as badly by selling out then missing out on strong rebounds after sharemarket corrections.
It’s the number one reason why taking a long-term investment approach is vital. Markets may confuse us all, but in simple terms are just a reflection of the value of all the companies that are traded in them.
Stick with your investment strategy, invest for 10 years not 10 weeks, and stay away from China for now.
Originally published as Why Aussie shares have seemed immune to coronavirus fears
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