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COVID-19 and the global market volatility

This is a significant opportunity as value has returned to the market

Massimo Guiati Global CEO of Azimut International

It is becoming increasingly apparent that the Corona-virus is far more serious than previous incidents of viral outbreaks, such as SARS in 2003 and H1N1 (swine flu) in 2009. Italy has effectively gone into lock-down / self-isolation and the US has just announced a ban on travel from Europe. The impact on economic activity will be significant, resulting in a fall in profits of many businesses. The obvious ones are airlines, travel companies, tourism etc. Less obvious is the supply chains in manufacturing. China manufactures not only finished products but also many components of finished products. If retailers cannot source products or their components to sell, then their profits will also suffer.

Of course a business should be valued on it’s profitability. All else being equal the value of the business should fall in line with the dip in profits. However, what is happening at the moment is the value of businesses that are listed on the market are falling as though profits will be affected for many years to come. The 64 million dollar question – “is that likely?”

It seems probable that it can be controlled. Infections in China and South Korea have plateaued. These countries went to extraordinary lengths to contain it, but none the less it appears contained. It is yet to be seen whether a country the size of the United States or even Australia can implement similar measures. Even if they do it will have significant ramifications for world economic growth. But would this mean company profits will be hit for years to come? I suspect not.

There will be positive news at some point. In the short term there is indications that Chinese workers are heading back to the factories.

We have access to the resources of a global company with investment expertise and offices in 15 countries. Carolyn Bindon, one of our directors and a senior financial planner here at Wealthmed attended a national teleconference on Friday with Massimo Guiati Global CEO of Azimut International based in Shang Hai.  His sentiments, given his global view, is that things will be difficult in the short term but this is a health crisis that has economic impacts NOT a structural problem in the world financial sector that will take decades to sort out.  On the contrary, he made the point that this is a significant opportunity as value has returned to the market.

When you consider this and that central banks around the world could coordinate significant financial stimulus (along the lines of what our government has just announced) and the sleeper could be the announcement of a breakthrough in vaccine research or another form of medicinal assistance. If by chance a positive announcement happens, market participants will decide that the impact will be short term and reprice shares accordingly.

Give all this, it is important to hold your long term strategies.  This has been proven many times even recently with a structural long term problem like the GFC clients who held their position recovered and had good long term results.  Those that reacted and sold down long term assets during the GFC missed the strong rebound in the markets and may still have not recovered.

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