Coronavirus: 3 potential economic and financial impacts in Australia

We examine the potential impact that the 2019 Novel coronavirus may have have on Australia's GDP, the iron ore market as well as a handful of ASX equities.

Australia’s GDP in focus

As heighted travel restrictions from mainland China to Australia kick in, analysts and market commentators currently expect Australia’s GDP to take a modest hit in CY20.

Under current conditions, ANZ analysts expect the coronavirus to take 'around 0.5ppt off Australia’s GDP in Q1.'

By comparison, J.P. Morgan analysts noted that, ‘We are downgrading 1Q GDP growth by 0.1 percentage point for both Australia and New Zealand, to incorporate the drag on services exports.’

Ultimately, both firms see the coronavirus’ impact on Australia’s flow of international visitors as one of the most significant consequences – with a particular focus on the ever-important Chinese market. Though making up just 16% of total international visitors, Chinese visitors, notes ANZ research, make up a significant 27% of total visitor expenditure.

Moreover, and looking at the most extreme possible scenarios – Westpac Institutional Bank posits that:

‘The direct effect of a complete shutdown of Chinese tourism and student travel for a year would reduce GDP by almost 1ppt with significant additional multiplier effects.’

On a global scale however, the overall economic impact remains difficult to quantify; with the International Monetary Fund’s Managing Director, Kristalina Georgieva recently saying:

‘In the short term, is likely to bring some slowdown,’ but ‘in the long term, we don't know. We have to assess how quickly action is being taken to contain the spread of coronavirus and how effective this action is.

Commodities comes under pressure

Besides expectations of weaker GDP growth, stocks in the metals & mining sector – or those linked to commodities such as iron ore – will likely be closely watched by analysts and investors in the months ahead.

Tellingly, when the Chinese markets reopened on 3 February – copper, oil and iron ore all witnessed steep losses; with iron ore falling to an intraday low of 603.5 yuan per tonne in Dalian – or ~US$85.95 per tonne.

The losses didn’t stop there, with Bloomberg today (4 February) reporting that ‘iron ore in China drops another 5.9% as commodity rout deepens.’

80% of Australia’s iron ore exports are China-bound.

This downward price action has seen the share prices of Australia’s big three iron ore miners – Rio Tinto, BHP Group and Fortescue Metals Group – all struggle in the last few weeks.

Mind you, this impact may potentially prove more widespread than just weaker equity prices across the big three miners – given Australia’s economic sensitivity to the price fluctuations of iron ore. As Australian Government research flagged: ‘an increase of US$10 per tonne FOB in the iron ore price results in an increase in nominal GDP [of] over $13 billion in 2020-21.’

Non-cyclicals in focus

Lastly, though equities with exposure to iron ore (FMG, RIO), travel (SYD, WEB), or Chinese consumer markets (A2M) may potentially be impacted by the coronavirus concern in the months ahead – stocks with defensive, non-cyclical qualities – could provide investors with some insulation from this heighted volatility, according to certain fund managers.

Argo Investment's Jason Beddow, for example, cited biotech giant CSL, Ramsay Health Care, Coles and Woolworths as potential candidates for investors seeking such protection. ‘I think health stocks will do relatively well if things get a bit shaky on world markets,’ Mr Beddow said in a recent interview with the Australian Financial Review.

Other large-cap ASX-listed non-cyclicals include: utilities (APA, AGL), consumer staples (WOW, COL) and health care (CSL, RHC, SHL).

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