Global equity markets fell sharply in late February when reported cases of the novel coronavirus (COVID-19) spiked in Europe. All major foreign stock exchanges declined over the month in local currency terms, with Emerging Markets performing the best by declining by only 3.8%. The value of the Australian Dollar decreased against most major currencies, somewhat dampening the impact on global returns when measured in Australian dollar terms. Global investment grade credit spreads widened substantially over the month (i.e. the market’s perceived riskiness of lending to high quality companies increased).

The United States Senate voted to acquit President Trump of both articles of impeachment (abuse of power and obstruction of Congress) on the 6^th of February 2020. The charges were voted down 52-48 and 53-47 respectively, well short of the two-thirds super majority required to remove the sitting president from office. Following the acquittal, President Trump’s approval rating reached its peak of 49% since taking office in January 2017.

 

Elections for the democratic nominee to run against President Trump are under way.  Four states have already completed their elections. On the Republican side there’s little surprise that President Trump has overwhelming support and looks certain to be the Republican nominee. On the Democratic side the senator from Vermont, Bernie Sanders, has secured the most delegates thus far, with tight election first and second places in Iowa and New Hampshire and a wide margin of victory in Nevada. Former Vice-president Joe Biden underperformed in the first three contests but had a large victory in South Carolina. Attention now turns to Super Tuesday on the 4^th of March where 14 states vote and approximately 34% of the total delegates are awarded. Michael Bloomberg, former New York mayor, will appear for the first time on the ballot in all Super Tuesday elections. Whilst the majority of political commentators concluded that Bloomberg’s two debate appearances were not successful, his spending has far exceeded that of any current or historical candidate. All eyes will turn to the results from Super Tuesday to see if one candidate emerges as likely to seal the nomination ahead of the Democratic National Convention in July.

 

The United Kingdom (UK) has left the European Union (EU), and negotiations will begin shortly to try to reach a comprehensive free trade agreement before the end of the transition period to 31 December 2020. There’s an extensive list of policy arrangements that need to be agreed including immigration, energy transfers, law enforcement, security of information, fisheries, aviation, and nuclear cooperation, to name a few. The UK government announced it intends not to be part of the single market or the customs union and published a formal document titled “The Future Relationship with the EU”. The latest stance from Prime Minister Boris Johnson is that if the EU doesn’t agree to the broad outline in its published document by June then negotiations will be cancelled by the UK. If the June deadline is not met, the UK government suggested it would turn its attention to domestic affairs to be as ready as possible for the end of the transition period. This result would be akin to a no-deal scenario.

 

Coronavirus

In February the effects of the coronavirus shifted from being perceived as a mild health threat to a potentially disastrous problem with serious economic and social effects. As of the 2 March 2020, over 3,000 people have died and the coronavirus has been detected in 67 countries. Whilst reported cases inside China have decreased in number since mid-February, cases globally have been growing at a faster rate. 

 

Late February saw the quickest ever correction (a 10% drop in value) from peak in US equity markets in just 6 days, with the S&P 500 share market index falling 11.5% from the 20 to 28 February 2020. Other global equity markets experienced similar falls after anticipating substantial impacts on economic activity. The full effects of supply chain disruptions and knock on effects will unfold in the coming months. Central banks have acknowledged the risks to the economy, and the Chair of the Federal Reserve, Jerome Powell, has indicated his willingness to cut rates if necessary.

 

There is still significant uncertainty around the incubation period and death rates associated with COVID-19.  Mortality rate estimates range from less than 1% up to 4%, with consensus remaining around 2%. Elderly citizens and those with a pre-existing condition appear to experience significantly higher mortality rates than the average. The long incubation period and ease of transmission makes the virus hard to contain. Countries such as Australia have imposed quarantine restrictions of varying levels. As of 1 March 2020, quarantine restrictions apply to travel from Iran as well as China. For example, Australian citizens will be able to enter Australia having visited those countries, though they will be required to self-isolate for 14 days following their return date.

Japan, one of the hardest hit countries by the virus so far, has closed all its schools until April. On the 3 February 2020, Prime Minister Abe’s government also ordered passengers and crew of the Diamond Princess, a cruise ship docked off the coast of Japan, to remain aboard the ship in a quarantined state. All passengers and crew members were subsequently released from the Diamond Princess by 1 March 2020. The Olympics are scheduled to begin late July in Tokyo this year, and as a result of the COVID-19outbreak, members of the International Olympic Committee (IOC) have suggested the Games could be cancelled. Although Japan has held the Olympics before, in 1964, the last time the Olympics Games were cancelled was in 1940 (due to the second world war) and coincidentally the host city was scheduled to be Tokyo.

 

Equities

The majority of foreign equity markets posted negative returns in February of at least 8%. Developed markets returned -8.5% in local currency terms (and -4.9% in Australian dollar terms), whereas emerging markets outperformed relative to developed markets, returning -3.8% in local currency terms. The worst performer was the United Kingdom’s FTSE 100 which returned -9.0% for the month, having to contend with both the virus and an increased likelihood of a no-deal Brexit.

 

The Australian stock market generated a return of -7.7% during February, with all 11 sectors contributing negatively. Energy and Information Technology were the worst performing sectors returning -18.2% and -17.6% respectively. The best performing sector was healthcare which returned -3.8%.

 

From a developed market sectoral perspective results were qualitatively similar to the Australian Stock Market. Communication services and health care were the best performing sectors, returning -6.3% and -6.5% respectively. Energy was the worst performing sector for the second consecutive month, declining 13.2%, as commodity prices have been hit particularly hard by Chinese efforts to contain the coronavirus.

 

Bonds

The Australian government bond yield curve flattened marginally over February as two-year and ten‑year yields decreased by 0.11% and 0.13% respectively amidst risk-off moves in markets. Decreasing bond yields are positive for short term bond investment returns. Ten-year Australian government yields reached historic record low levels of 0.55% during February.

 

All major global government bond yields decreased over the two-year and ten-year maturities throughout February. The United States government bond yields fell the furthest, reducing by 0.40% and 0.36% over two-year and ten-year terms.

 

Currencies

The Australian dollar weakened against all major currencies, except the British Pound (which remained relatively neutral), by at least 1.5% over the month due to risk off sentiment following the outbreak of the coronavirus. The Australian dollar decreased by 3.0%, 2.6% and 2.1% against the Japanese Yen, United States Dollar and Euro respectively.

 

The Australian Dollar finished the month at 0.6515 US Dollars, down 1.8 US cents over the month.

 

Commodities

The price of WTI and Brent crude oil decreased 13% during February (and 26% since 1 January) driven by declining forecasts for global demand. Industrial metal prices decreased 1.1% on average, with iron ore the worst performer dropping 8.3%. In precious metals, gold remained broadly neutral and silver saw a decline of 7.6% for the month.

Performance of key markets:

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	-7.7	-0.1%	8.6%
International Shares	MSCI World Ex Aust Unhedged A$	-4.9%	8.3%	15.6%
International Shares	MSCI World Ex Aust Hedged A$	-8.5%	-0.7%	4.4%
US Shares	S&P 500 Index	-8.2%	1.8%	8.2%
UK Shares	FTSE 100 Index	-9.0%	-8.8%	-2.7%
Japanese Shares	Nikkei 225 Index	-8.8%	0.4%	1.0%
Australian Listed Property	S&P/ASX 200 A-REIT Index	-4.9%	1.1%	11.8%
Australian Fixed Interest	Bloomberg AusBond Composite Index	0.9%	3.9%	9.0%
Australian Cash	Bloomberg AusBond Bank Bill Index	0.1%	0.7%	1.3%
Currency	AUD/USD	-2.6%	-7.2%	-8.2%

Returns are for periods to 29 February 2020. Past performance is not an indication of future performance.

This commentary was written at month end and is accurate as at the end of February 2020. Some topics covered are ever changing and may render the above content not an accurate reflection of current events.