Markets were primarily focused on developments around the Coronavirus “2019-nCov” outbreak in China. As the month progressed it became increasingly apparent that an outbreak had occurred. Unsurprisingly markets looked to previous viral outbreaks to draw inferences on the potential human and economic costs with the more recent viral outbreaks SARS (2003), H1N1 (2009) and MERS (2012) featuring in the media and commentaries.
We can draw some comfort from the features of the virus and the strong policy response. The most important areas of risk to New Zealand’s economy are in our exposure to China through export of commodities and in domestic services we provide including tourism and educational services. It is important to note New Zealand’s exposure to China in these areas is significantly higher than during the SARS outbreak of 2003. This can be seen in the massive increase in the proportion of New Zealand’s commodity exports going into China. Prominent amongst these are: Forestry increasing 5x to 46.1%, Beef increasing 137x to 46.1%; Sheep meat increasing 18x to 41.6%; Seafood increasing 9x to 35.2% and Dairy increasing 6x to 32.5%. In relation to tourism we note Chinese visitors account for 10% of all arrivals (3% in 2003) and their associated spend on travel services is estimated to account for ~1% of NZs nominal GDP. In the event of a more mild play out of the Coronavirus we expect a limited temporary impact with growth returning as the outbreak is brought under control. We would expect the Reserve Bank to look through any impacts on growth, employment and inflation in this scenario. Should the outbreak intensify in its severity and geographic dispersion, the impact would be larger and a policy response may be elicited from the Reserve Bank.
From a diversified fund perspective, January provided investors with another strong month of performance notwithstanding that the Coronavirus situation knocked some of the confidence out of global equity markets late in the month. NZ investors who had exposure to foreign currency in unhedged global assets received the benefit of the stronger NZ dollar. With so many underlying sectors (including NZ equity, global and domestic bonds and unhedged global equities) providing several months’ worth of expected returns in just one month it’s unsurprising to see each of the Conservative, Balanced and Growth funds produce returns in excess of 1% for the month. Clearly this is unusual and we expect more modest returns in the coming months.