The virus, originating in China's Wuhan, has prompted a massive clampdown on movement in the country and raises the alarm about how supply chains and travel will be disrupted in coming weeks. Stock markets have tumbled, encouraging a flow to safe-haven asset classes. Here are some industry reactions.
Global equity markets and others were hit hard yesterday as news reports showed that the deadly coronavirus in China had claimed more lives, prompting the country to impose draconian travel bans and other restrictions. The outbreak reminded investors of the SARs virus outbreak of almost two decades ago, and how it heavily disrupted transport and supply chains. Today, European equities recovered slightly, but Asia was still under pressure. Spot gold prices rose to $1,585 per ounce on January 27 (source: BullionVault). Hong Kong has announced plans to slash cross-border travel between the city and mainland China. More than 100 people have now died in China, with confirmed infections surging to more than 4,500 (source: BBC, other outlets).
Coming on top of US-China protectionism and rows about intellectual property rights theft and other abuses, the Chinese virus will rattle investors already concerned that equity market valuations were becoming overcooked, particularly in the US. People may have wondered whether there were any “black swans” about to fly over the horizon this year, and it appears an early flock has arrived from Asia.
All that said, information about the scale of what is going on is not easy to obtain, and not simply because Communist-controlled China heavily controls the media and non-domestic access. The flipside of an authoritarian state is that it can act decisively in ways that more liberal nations cannot. Making an investment judgement call is difficult.
Here is a collection of comments from around the world. The regional diversity of comments is deliberate, precisely because this is a global issue, with international implications. (Of course, some of the commentaries may be out of date even by the time this article goes live, given how fast events are moving, so the usual caveats apply.)
Seema Shah, chief strategist at Principal
Fears around the spread of the coronavirus are being reflected – violently – in global markets. The dynamics of how concerns about the virus translate into market movements are different to that of SARS back in 2003. Risk velocity – the pace at which major risks and “black swan” events can affect asset prices – is elevated in today’s markets compared to 10 years ago for three key reasons.
Firstly, the rise of social media means that there is a global echo chamber for major, anxiety-inducing events. At the time of the last financial crisis, people generated approximately 300,000 tweets per day; 10 years on, there are more than this number in a single minute and more than half a billion a day. The echo chamber to amplify market anxiety has never been more powerful.
Second, aside from the obvious concerns about the greater potential for human spread of the virus, global supply chains have proliferated in their size and complexity, so companies globally have more potential to be impacted significantly by the temporary shutting down of companies and transport links. While companies with strong ties to China are feeling the hit, even companies that are ostensibly entirely detached from China are finding themselves impacted. As global supply chains have multiplied and become more inter-reliant, the potential for a rapid domino effect, triggered by another part of the chain, has never been higher.
Thirdly, asset valuations are at all-time highs. With markets “priced for perfection”, disruptive events which shake investor sentiment are capable of having outsized influence. Markets have also been priced for a global recovery in growth. While China was not expected to drive nor lift a global recovery as it did in 2015/16, a stabilization in China’s economic activity is certainly at the heart of forecasts for European stabilization and an Emerging Asia upturn. China’s Q1 economic growth is already likely to take hit as the coronavirus impacts a wide range of industries including, but not limited to, retail, transportation, and tourism before, if the SARs episode is anything to go by, picking up in the second half of the year. However, if the magnitude and duration of the coronavirus shock is greater and more persistent, then the basis for positive 2020 economic forecasts will be undone.
Alastair George, Edison Group, the
At the present time, in our view the key for investors is to focus on the economic costs of controlling the outbreak, rather than fearing mass panic. A downgrade to Chinese GDP for Q1 2020 appears likely. Until cases have peaked, we believe that travel and entertainment sectors are at risk of underperformance.
It was a surprise to us just how resilient markets had been in the face of adverse coronavirus headlines, given the precedent of SARS and its impact on markets in 2003. At this early stage, while basic parameters such as the R0 value (the number of new infections per infected human) and mortality rate are subject to a high degree of uncertainty, it is a fact that in China 40 million people already face significant travel restrictions.
Indications are that the outbreak is at the relatively early stages in China and it will take some time to bring it under control there. Nevertheless, while there have been some cases outside China there does not appear at this stage to be an epidemic of viral pneumonia in other nations – where public trust in data collection and case reporting is relatively higher.
The number of reported cases is likely to escalate sharply as the awareness of the disease grows but estimates of the mortality rate also decline as testing becomes more widespread for milder cases. In particular, China’s current reported case mortality rate of 2.9 per cent may significantly overstate the actual danger from infection if there is a much larger number of undiagnosed and minor cases.
On the critical assumption that the mortality rate is no worse than other viral respiratory diseases such as influenza, scenarios of mass panic are less likely to develop. Work to find a vaccine, building on the research for a SARS vaccine may bear fruit within a two-year period. In such a scenario, economies will be impacted by the measures taken to reduce transmission but provided these are not as draconian as those currently imposed in China the economic impact would be relatively modest.
In this regard, consensus GDP forecasts for China’s growth during
2020 are likely to come under pressure with spill-over effects
across the region. Travel, discretionary and
entertainment-related sectors are also likely to underperform
until a peak is seen in the rate of infections and restrictions
on travel and social contact lifted. We note that it may also
take some months, rather than days or weeks, for the evidence for
any reduction in the rate of infection to be visible in the