Coronavirus and the growing impact in financial markets

The 2020 calendar year is less than two months old, yet the amount of noise being provided by global events with the potential to impact on share markets are many and varied. Consider the following events:

  • The US killing a leading Iranian general
  • Iran shooting down a Ukrainian passenger plane
  • Brexit
  • US-China trade tensions continuing
  • Trump Impeachment trial
  • Australian bushfires and subsequent heavy rain
  • Corona Virus
  • US reporting season exceeding expectations & Australia generally solid
  • US election year primaries underway

Up until recent days, global stock markets have shrugged off all the potentially negative events and the US and Australian share markets have reached all-time highs. That is now changing as the concern about the global spread and economic impact of Coronavirus increases. Share prices are pulling back significantly from their recent highs and interest rates are falling even further as investors rush into low yielding bonds for perceived safety. The Australian dollar and oil prices continue to fall and the gold price continues to rise.

Investor optimism on China has assumed the coronavirus would come under control and the Chinese central bank would aggressively stimulate the economy, leading to a rapid rebound. Hopefully, this will happen but neither looks like a good assumption. There is still a risk that the virus spread within China could reaccelerate as movement restrictions are lifted. As for the economic impacts, consider:

  • Hundreds of millions of people are in some form of quarantine.
  • There has been a collapse in car sales and property sales.
  • You’ve seen the pictures of deserted cities right across China.
  • Countless companies in China are saying that if this isn’t all resolved in the next few weeks the coronavirus will put them out of business.
  • China already has a massive debt burden and corporate defaults were rising rapidly before coronavirus arose.
  • China is at the beating heart of global supply chains.
  • Here in Australia, we face the economic reality that our largest trading partner is largely in lockdown.
  • The Chinese are our largest tourist market, with 1.4 million visitors each year.
  • China now buys 44% of our wine exports.
  • 28% of our agricultural exports go to China.
  • And we all know that education for international students is our third largest export and that Chinese students comprise the largest share of students from abroad.

It is not possible to estimate exactly how far the current correction in response to coronavirus will go but, given China’s importance to the global economy and the increasingly significant economic impacts becoming evident across the world, there’s the potential for a decline of 10% or perhaps even 20%.

While this seems potentially dramatic, it should be remembered that shares were at somewhat elevated levels before the impact of coronavirus outside Wuhan became evident and sharp moves in share prices of this magnitude are not rare. The US market fell 20% in the December quarter 2018 – just over a year ago – because of the fear of rising interest rates and Australia fell by a similar amount. The good news is that share markets quickly recovered and 2019 proved to be a very good year for investors. If the economic impact of coronavirus gets worse you can be sure that Central Banks and Governments worldwide will be acting to stimulate their economies.

What is happening in financial advice post the Hayne Royal Commission

The good news is that most people seem to be happy with the direction things are heading: always putting the best interests of the client first, eliminating any conflicts considered by a reasonable person to sway decision making, pushing front-line advisers to be better educated and requiring them to exercise good judgement. Of course, these are all things that you might well have expected of someone providing financial advice but it hasn’t been the case in all instances, obviously.

The direction of change is clearly right, but the implementation continues to be very disruptive with substantially increased compliance requirements, which are pushing up costs significantly across the industry. This is also leading to a reduction in the number of financial advisers and there is a significant risk that financial advice will become unaffordable for many people. Adviser Ratings suggests that up to 40% of Australian advisers will leave the industry within the next 5 years and we could see similar impacts to the UK. Their Retail Distribution Review resulted in the cost of advice almost tripling, 30% of advisers leaving the industry and millions of consumers left unadvised.

Changes to Income Protection insurance cover across the industry

Because of persistent losses on Income Protection policies, despite rising premiums, the insurance industry regulator, the Australian Prudential Regulation Authority (APRA), is forcing some changes on industry participants. In particular, they are requiring insurers to stop offering new Agreed Value Income Protection policies. Sale of Agreed Value IP policies will cease from all the major insurers, including AIA, CommInsure, MLC, OnePath, TAL & Zurich over the next two months.

In force (existing) policies that currently have IP Agreed Value benefits can retain those benefits and will not lose them from 1 April 2020. Applications to increase the sum insured on existing IP Agreed Value benefits can also be applied for in the future.

No new CommInsure policies from 31 March 2020

AIA Australia has announced the next step in its integration with CommInsure Life, which it acquired last year. They are streamlining the combined Retail Advised Life Risk business, across both the AIA and CommInsure Life portfolios. From 31 March 2020, CommInsure Protection products will no longer accept new business.

This will have no impact on existing policies which will remain on current terms and continue to be serviced, including allowing increases or decreases to covers, addition or removal of benefits and replacement of policies. The timing of this change will coincide with CommInsure’s implementation of APRA’s Agreed Value Income Protection changes.

Unfortunately, CommInsure will also be increasing premiums on their Income Protection (IP) policies in the coming months. You will receive further notification from CommInsure before your policy anniversary, if you have a CommInsure IP policy, as to how this impacts you.

Environmental, Social & Governance (ESG)

Climate change is having a significant impact in the way that many of the world’s large companies and fund managers operate irrespective of your personal views on this subject. According to the 2019 Willis Towers Watson study of the “Worlds’ largest 500 managers” , investors from the global top 20 including Allianz, Amundi, AXA, BNP Paribas, Blackrock, BNY Mellon, Capital Group, Fidelity, JPM, Prudential, State Street, Vanguard & Wellington have all made statements in the past 12 months espousing their ESG credentials.

There is a somewhat limited range of specifically ESG managed funds and ETF’s currently available in the Australian market, but the range is growing and many fund managers are applying some form of ESG screen to their funds even if they aren’t specifically labelled sustainable or ESG.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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