26 Feb

Diamonds Rock Solid as Markets Tank

It has been a week of cascading losses on global equity markets, as fears over the spread of coronavirus continue to spread. Far from being contained as we all hoped, it looks to have spread, with the number of cases seen globally rising by the day.

The impact on the economy will be meaningful, with United Airlines withdrawing their forecasts for 2020 due to the impact of the virus. They have reported a 75% decline in near term demand for flights to the Pacific, and essentially a 100% fall in demand for flights to China.

Markets, which at first didn’t seem too concerned about the impact of the virus on the global economy, are beginning to wake up, and the result isn’t pretty.

This can be seen in the table below, which shows the performance of a range of equity markets around the globe. As you can see, it is an unrelenting sea of red, with all of them falling meaningfully.


Losses were particularly acute in Europe, no surprise given a number of cases of coronavirus have been identified in Italy, with fears that it will spread across the continent.

Authorities have been swift to react, with parts of Europe now in lockdown, with movements of people restricted so as to prevent contagion. The Italian economy will almost certainly suffer, as the epicentre of the virus is in Lombardy and Veneto, which are financial and industrial centres. Schools, museums, cinemas and the like have all been shut, with over 200 confirmed infections and seven people dying in recent days.

Further highlighting the global threat, there has been an outbreak of the virus in Japan, Korea, and Iran as well, with Dr Bharat Pankhania of the University of Exeter Medical School stating that; “We now consider this to be a pandemic in all but name, and it’s only a matter of time before the World Health Organization starts to use the term in its communications.”

Whilst we can only hope that this virus does not continue to spread, and that fatalities are minimised, it helps to be prepared, both in our personal lives, and with our investment portfolio.

Given the obvious risk factors that this virus poses, one can expect elevated sharemarket volatility and uncertainty for some time to come. This helps support the investment case for pink diamonds as hard tangible assets that offer capital stability in the short-term, with pink diamonds also able to perform irrespective of the worrying trends in financial markets.

How about Australia

The outlook for Australia is particularly poor in the months ahead, given our reliance on China for commodity exports, tourism and education, and the quasi-shutdown of the Chinese economy.

There are a number of charts we could show which highlight the impact coronavirus is having on the Chinese economy, though none that illustrate the disruption as succinctly as the below, with passenger traffic in the most populous nation on earth collapsing in the last month.


Daily Passenger Traffic in China

Daily Passenger Traffic in China

Source: Capital Economics, Ministry of Transport

That is not an economy that is about to bounce back anytime soon, nor one that will only see a slight reduction in economic output.

Amazingly, despite the threat, Australia looks like it will relax its travel ban on people coming in from China, with the government allowing students from China to enter the country to continue their studies, with the ban set to be lifted at the end of the week.

Despite the move to allow Chinese students into the country, Prime Minister Scott Morrison has warned that the economic impact of the coronavirus on Australia will be more significant than the recent bushfire crisis.

Given the above, we can also expect further downside pressure on the Australian dollar, with a not insignificant chance that the AUD could fall to USD $0.50 in years to come.

This will obviously boost the return potential of pink diamonds, as it has for the last few years, adding a currency kicker to their investment potential.

Central Banks will respond

One final factor worth mentioning in the context of the coronavirus scare is the likely reaction from central banks, including The Reserve Bank of Australia (RBA). Whilst it’s unlikely they will all ‘pull the trigger’ and announce immediate interest rate cuts, there is no doubt the virus will:

  • Put more downside pressure on interest rates
  • Put more pressure on central banks to keep rates lower for longer
  • Increase the chance we see more money printing, including in Australia

Market participants are certainly betting that the above will happen, with interest rate cuts now the base case expectation in Australia, the UK, Canada, New Zealand and the United States.

As we’ve long warned about in our ‘In the Loupe’ updates, cash in the bank is dead money. Investors who keep their money in cash are all but guaranteed to go backward in the decade to come.

Coronavirus just adds to that, making genuinely rare assets all the more valuable, and all the more likely to protect and grow wealth in the years ahead.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.


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