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The Black Monday fall: Morningstar’s outlook

Lex Hall  |  10 Mar 2020Text size  Decrease  Increase  |  
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The “Black Monday” fall in global equities is the worst since the GFC and has triggered fears of worldwide recession.

As part of our special coverage on the market turmoil, we will seek to give you a little perspective. It’s worth noting, for instance, that in the lead-up to the overnight plunge (6 March), several world markets were undervalued, by Morningstar’s estimates. They include:

  • Lowest is Belgium at 25pc undervalued
  • Australia is 2pc undervalued
  • US is 8pc undervalued
  • UK is 19pc undervalued
  • South Korea is 19pc undervalued
  • China is 16pc undervalued
  • Japan is 18pc undervalued

The beginning or our coverage will assess:

  • the economic impact of the virus to world GDP
  • the coronavirus and how it compares to past pandemics
  • the progress being made on a vaccine
  • what the Russia-Saudi Arabia impasse means for oil markets

And in the interests of avoiding panic-buying—and panic-selling, for that matter—we tap Morningstar behavioural economist Sarah Newcomb for her take.

“As investors, we’re constantly told to remain calm during market turbulence,” Newcomb says.

“Anxiety lowers cognitive abilities, risk tolerance, and confidence, so it’s not the ideal emotional state for an investor.

“As it turns out, though, trying to calm down when the markets are crazy might be ineffective advice.”

US futures show signs of easing after ‘Black Monday’

First a little background. Overnight, stocks on Wall Street plummeted so fast on what traders are now calling "Black Monday" they triggered the first automatic halt in trading in more than two decades.

The Dow Jones plunged more than 2000 points, or nearly 8 per cent, at one point as global trading entered panic mode as an oil price war compounded coronavirus woes.

European markets entered a bear market, with the heaviest losses since the darkest days of the 2008 meltdown as oil prices plunged amid a price war between Saudi Arabia and Russia.

The Australian stock market suffered its worst single day loss in nearly a dozen years on Monday.

However, on Tuesday morning US equity futures were already showing positive signs in early Asian trading amid news Donald Trump will release measures to ease the economic impact of Covid-19.

Trump's major stimulus news has helped Australian shares rebound from panic selling that also smashed global equities markets overnight.

The benchmark S&P/ASX200 index was up 48.3 points, or 0.84 per cent, at 5808.9 points at 12.31pm Sydney time on Tuesday after plunging 3.8 per cent in early trade.

The broader All Ordinaries index was up 49.3 points, or 0.85 per cent, at 5871.7 as banks and oil stocks gained.

In Australia, Prime Minister Scott Morrison has vowed to avoid further cuts to essential services such as schools, hospitals and the NDIS as it deals with the economic impact of the health crisis.

The Coalition government is putting the final touches on a stimulus package, expected to be worth as much as $10 billion.

Minimal long-term economic impact

Morningstar equity analyst Karen Andersen says that while she projects “a grim set of scenarios in terms of fatalities”, she is much more upbeat about the economic fallout.

World GDP will take a hit, Andersen says, the but she doubts equities will tank further. She forecasts an average negative 0.2 per cent long-term impact on world GDP due to the pandemic.

“To be sure, we expect a much larger impact in the short run (with an average negative 1.5 per cent impact on 2020 World GDP across our scenarios),” she says.

“However, equity valuations on average should be unscathed if our long-term projections on GDP are correct. Therefore, we think a 10 per cent+ fall in global equities since the outbreak began is a gross overreaction.”

‘Severe but manageable flu’

If the covid-19 outbreak does become a moderate to severe annual threat, Andersen assumes vaccines will be available by the 2021–22 virus season.

According to her base case, Andersen sees treatments such as Gilead’s remdesivir becoming available before a potential second wave in the fall, which should alleviate capacity at hospitals.

“We would expect the disease to either become milder with time (like flu pandemics) or see no recurrences after the 2020 impact,” says Andersen.

“If this does become a moderate to severe annual threat, we assume vaccines will be available by the 2021–22 virus season.”

Oil price

Investors reading the headlines may be tempted to hit the panic button, especially as a collapse in oil prices adds further stress to already fragile economies and markets.

The Australian energy sector suffered a 19 per cent following the price war over oil. The OPEC+ alliance between Saudi Arabia and Russia to prop up oil prices collapsed over the weekend, with both countries expected to ramp up production in a stunning reversal of policy.

Brent crude futures, which had traded as high as $US65 a barrel as recently as January, plunged from $US45 a barrel on Friday to about US$32 at 3pm on Monday. Woodside Petroleum (ASX: WPL) dropped 18.3 per cent to a 15-year low of $21.83 and Oil Search (ASX: OSH) fell 32.5 per cent to a 13-year low of $3.435. Santos (ASX: STO) fell 26.0 per cent to a two-year low of $4.96.

Morningstar analysts David Meats and Mark Taylor will assess the oil price impasse, what it means for markets and for Australian energy producers.

Further Morningstar coverage:

 

 

 

is content editor for Morningstar Australia

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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