Falling Yuan

NEWS WRAP - Coronavirus - the Impact on Your Stocks

Earlier this week Chinese stocks posted their worst day since the ‘Black Monday' of August 2015 as the impact of the coronavirus outbreak showed no sign of abating.

Chinese economic statistics made for bleak reading and included the following:

  • A 1.6% fall in the Yuan.
  • A 7.7% fall in the Shanghai Composite (SHCOMP).
  • An 8.5% fall in the Shenzhen Component Index (SCI).*

Losses in the SHCOMP and SCI resulted in a combined loss of $445 billion and were perhaps expected by the People's Bank of China which earlier announced a 1.2 trillion Yuan ($173 billion) injection into Chinese bond markets in what amounted to a pre-emptive attempt to stabilise the country's economic situation.*

The bank also said it would look to stimulate investment and recovery by providing low interest loans to commercial investors looking to assist the fight against the virus. This move was foreshadowed by the National Development and Reform Commission, which announced that it would spare no expense in ensuring a robust recovery from the impact of the outbreak.

However, as the virus has spread from mainland China to other parts of Asia, including Hong Kong and Japan, it is expected that there will be a period of considerable volatility right across the region.

Diversify and expect the unexpected

Jim Cramer, the host of CNBC's Mad Money recently, advised his viewers to be prepared for the unexpected. He also cautioned against relying too much on the advice of market analysts.

"There are lots of very smart people in this business, but very few of them are infectious disease experts," he said.**

However, one thing is certain: any person who is overly invested in China or indeed Asia, is more likely to suffer losses, at least in the short-term. As such, the importance of a well-diversified portfolio is never clearer than during times of illness epidemics.

As it stands, US markets remain buoyant. At the same time that Chinese stocks took a plunge, the Dow (INDU), S&P 500 (SPX) and Nasdaq Composite (COMP) futures all experienced rises of between 0.5% to 0.8%.* This is not to say that the US or indeed US markets are immune to the effects of coronavirus but simply that, at the moment, they appear a more robust option.

However, the virus will undoubtedly have significant global ramifications, even if its impact is limited to best-case scenarios. Oxford Economics' relatively conservative forecast predicts that Chinese growth this year will fall to 5.6% (from 6.1% last year). This alone would likely slow global economic growth by 0.2% and result in a growth rate of 2.3% – the lowest since the global financial around ten years ago.***

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* https://edition.cnn.com/2020/02/02/investing/china-markets-coronavirus/index.html

** https://www.cnbc.com/2020/01/31/the-coronavirus-remains-a-big-wild-card-for-investors-jim-cramer-says.html

*** https://economictimes.indiatimes.com/news/international/world-news/sars-stung-world-economy-coronavirus-is-a-bigger-menace/articleshow/73912365.cms

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