Three political risks to investing in 2020
As we enter the new year, we consider how political issues could continue impacting the investment space. In our view, there may be three key political risks to markets in 2020.
The nature of the Wuhan Coronavirus makes precise forecasting exceedingly difficult. The only certainty here is that the level of uncertainty will likely result in a significantly higher level of volatility in financial markets, especially for equities. We explore below:
The outbreak of the Novel Coronavirus in China is the first Black Swan of 2020, and a very big swan indeed. This is an epidemic that is difficult to quantify due to the nature of the virus as well as the relative lack of transparency in China. However, we offer some insight below:
~ Firstly, the Chinese economy started 2020 in a weaker position having just recorded the lowest annual economic growth in 20 years and limping out of a damaging trade war with the US.
~ Secondly, much of the province of Hubei, including the city of Wuhan, is effectively locked down indefinitely. While one can argue that Hubei accounts only for 4.3% of Chinese GDP, the supply side disruption is more significant due to Wuhan’s status as an important national transport hub. Wuhan is also an important logistics hub, accounting for 1.2% of national freight traffic by weight in 2018.
~ Thirdly, while the extraordinary measures introduced by the Chinese government are necessary to control the spread of the virus, they are likely to lead to significant risk-avoidance behaviour by Chinese consumers and will curtail economic activity. Anecdotal evidence suggests that this is already happening – for example, the aggregate box office for the top ten Chinese movies on 25 January was just $1.12 million. On Sunday, the trickle of business halved again to a total of just $510,000.
In our view, the saving grace here is that the negative economic impact is likely to be short term and transitory in nature. Once the public is convinced that the epidemic is under control and various restrictions are lifted, we think economic activities could return to their normal levels.
1 Source: New York Times as at the morning of 2 February 2020, Sydney time.
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