Coronavirus: What can we learn from history?

Up until last month, our global outlook was one of moderate growth in 2020. Thanks to dovish monetary policy globally, this long economic cycle looked set to continue for another year. This remains possible depending on how quickly the coronavirus is contained. At present, we think the coronavirus outbreak will dent Chinese Q1 GDP growth and prompt further government stimulus. It is still too early to speculate whether it will trigger a global recession.

The shock to Q1 global growth has the potential to be significant, given disruption to activity in China itself, combined with the impact on global supply chains, trade and tourism, as well as overall uncertainty. Even in a ‘contained’ scenario of the virus outbreak, global growth could fall at least half a percentage point in Q1, with some recovery thereafter. The overall impact is likely to be protracted and may well extend further into the year. Around half of the estimated impact will come from a direct hit to China’s growth and the other half from a shock to its trading partners as well as to global tourism.

The way that global equity markets have performed during past epidemics may help gauge how they might respond to the current situation. There are two key takeaways for investors. Firstly, selling pressure tends to last for about 1-3 months. Secondly, markets tend to trough with the momentum of news flow relating to new infections. The news that coronavirus cases have spiked in Hubei province, which contains Wuhan, suggests that markets will remain volatile in the short term.

The next month will be a critical test in terms of assessing the economic damage wrought by the virus, with potentially important implications for our global outlook. The physical measures taken to combat the spread of coronavirus are more stringent than SARS and may bite harder into economic activity. As the costs of government support mount up, they may set back Chinese attempts to de-leverage. For now, the assumption among many of the companies we invest in is that the impact of the virus will be relatively short-lived and (like SARS) disappear as the summer arrives, triggering a snap-back in economic data, aided by Chinese government assistance to markets and the real economy.

Given how quickly the situation is moving, we are seeking to avoid trading on news flow and are instead focusing on longer-term themes and corporate fundamentals. Longer-term, China’s structural consumption growth story remains firmly in place. We continue to favour sectors and strategies aligned to innovation in China, and to see companies in this space as market share gainers despite any near-term disruptions.

These include sectors like online education service providers, online grocery, e-commerce and express delivery, and innovative healthcare solution providers. At the same time, these sectors should be well placed to benefit from pent-up demand in any recovery scenario once the outbreak is brought under control, especially if the government introduces measures to combat the possible dent in Chinese GDP growth.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only. Please remember past performance is not a reliable indicator of future performance. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for any Fidelity Australia fund(s) mentioned in this document before making any decision about whether to acquire the product. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad-based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. This material may contain statements that are "forward-looking statements", which are based on certain assumptions of future events.  Actual events may differ from those assumed.  There can be no assurance that forward-looking statements, including any projected returns, will materialise or that actual market conditions and/or performance results will not be materially different or worse than those presented.  While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity's funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details of Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website.

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