Catastrophic fires and China in lockdown

 

While still early into the 2020 calendar year, we’ve seen significant global and local events that have had an immediate impact on communities, with longer term impacts that are likely to be felt for a while yet.

This summer, Australians have experienced one of the worst bushfire seasons on record with over 17 million hectares of land burnt, thousands of homes destroyed, and the tragic loss of 33 lives. These bushfires have devastated some of the already severely drought affected areas of the country. They will continue to affect the lives of many Australian families and communities long after the fires have passed.

While volunteers were still fighting fires, the world started to hear of coronavirus. Originating in the Chinese Wuhan province, a new strain of coronavirus named ‘coronavirus disease 19’, or ‘COVID-19’ has been making headlines across the world. This new strain has led to governments imposing restrictions on both trade and travel to help minimise the spread of the virus. These restrictions will have a negative impact on global growth as trade in the world’s second largest economy temporarily grinds to a halt.

These events have weighed on the Australian economy in a few ways. They include through a direct impact on farmers and local business owners in drought and bushfire affected areas; a reduced number of tourists visiting Australia; and supply chain disruptions for businesses that rely on imports from China. In a recent address to the National Press Club, RBA Governor, Philip Lowe has stated they expect a further decline of around 10 per cent in farm output during 2020 and that “this is a stark reminder that the economic effects of these climate events are material.” Whilst the immediate economic impact of these events are significant, the Chinese and Australian governments have already taken steps towards financially stimulating and supporting affected areas to help minimise any potential long-term damage.

Things to watch in 2020

China and the US have agreed on phase one of a trade deal which has helped to calm tensions between the two countries. Whilst some of the issues are yet to be resolved, this initial agreement shows that the two countries are willing to work together and compromise in developing a trade agreement that can work for both parties. This trade deal has contributed to improved market (investor) sentiment as both sides have, at least temporarily, placed a hold on increasing tariffs or imposing trade restrictions.

After a lengthy nine months of demonstrations, the protests in Hong Kong continue with seemingly no end in sight. Whilst is it unclear how the situation will resolve itself, any excessive force used by the Chinese Government would likely face international backlash and result in heightened global tensions and increased market volatility.

In Europe, the UK officially left the European Union on 31 January 2019. Over the next 11 months, the UK will continue to follow all the EU’s rules, and the trading relationships between the two will remain unchanged until 31 December 2020. This transition period is intended to allow time for the EU and UK to reach a new post-Brexit trade agreement, however any delays in reaching an agreement could be expected to impact investment markets in the short-term.

With the US entering an election year, investors will be paying close attention to the race for the democratic nomination. Each candidate brings their own set of policies and ideologies which have the potential to shake up both the US and the broader global economy if they’re successful in beating Trump in the November Presidential election.

Market performance

Share markets provided strong returns over the 12 months to 31 December 2019 with Australian shares1 returning 23.77%, however this is in part a result of markets coming off a low base after falling significantly at the end of 2018. This rebound highlighted that switching out of an investment option based on short-term market movements can be costly.

With the expectation of continued challenging market conditions, low levels of global growth, and interest rates remaining low, Cbus has made some changes to our investment options to reflect a lower return environment.

 

1 S&P/ASX 300 Accumulation Index