Coronavirus and the impact on global markets

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Coronavirus and the impact on global markets

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Posted on: 28/02/2020

We came across this article, written by Christopher Cowell of Seven Investment Management, on the subject of the coronavirus outbreak and the economic and financial impact of the epidemic.

The article is slanted towards the investment side of things but also contains some very useful general information. We felt that both aspects may be of interest to Lifetime clients.

 

Mr Cowell writes: “At a headline level, it might seem like things have changed for the worst. As of 25 February 2020, the coronavirus has been identified in 33 countries, with 80,239 confirmed cases globally. While most of these cases are still within China, the news of cases in Italy (229) and South Korea (977) was a shocker. Is coronavirus getting worse? And where to from here?

“There are some important considerations when trying to forecast the impact of the coronavirus: 1. Major negative economic impacts relate to public health policy countermeasures (shutting down travel and trade, rather than mortality or infection rates); 2. While it is hard to chart the course of an epidemic, the current statistics are pretty well known, assuming that the data is consistent and correct.

“The upshot is that whenever the epidemic peaks and begins declining, (a) the odds strongly favour the viral threat continuing its retreat, and (b) public health policy countermeasures will soon be lifted and economic activity will rebound.

“So while the daily China data reports should be met with some scepticism, it does appear that the spread of the virus is under control. Daily data on new cases already suggest that the virus peak has been passed.

“And once you scratch beneath the surface of the headline numbers, there are some important points:

  • Despite popular perception, there has been no significant change in the strain of the virus.
  • The fatality rate in Wuhan, China remains around a fifth of what SARS was. Outside of Wuhan, the fatality rate falls to less than a tenth of SARS.
  • It is important to remember that symptoms range from mild to critically ill – not everyone who contracts the virus goes into critical care. So far, younger age groups are unlikely to fall into a critical condition if they contract the virus.
  • The latest number of cases in Hubei (64,786) is in line with what was predicted a month ago – the virus is not spiralling out of control.

“To date, it looks as though containment is largely working.

Which leads to the key question: what effect will coronavirus have on economic growth in China, and worldwide?

Policy measures in China have focussed on three things. Cities have been in lockdown, factories have been shut and travel has been curtailed. So we should expect weaker consumption and service sector data out of China over the next month or two. There will be some weaker tourism numbers from places like Japan and South Korea. And given China’s importance to global supply chains (particularly electronic components), we would expect some weaker manufacturing data from countries with strong trade links to China.

“These patterns are already showing up in market prices. Chinese airline stocks, for example, are down around 15% year to date. Companies that either source products from China or sell to China, like US technology companies and European car makers, are also suffering.

“While public health policy countermeasures are negative for growth, we are optimistic the Chinese and East Asian economic data will rebound soon.

“Putting the story together, we think the economic impact of coronavirus will be short-lived and contained.

“Meanwhile, remember that the goal of global multi-asset portfolios is to be diversified. They are not especially vulnerable to this kind of uncertainty. Furthermore, they are also built with a long-term view, so we are not overly concerned about the likely short-term economic impact of coronavirus.”

 

Here at Lifetime we also strongly believe that if your long-term goals haven’t changed then why should your long-term strategy change?

When the Sars epidemic happened in 2002-2003 global shares went down 6.1% but bounced back 34.6%.

Similarly, in 2012-2013, the Mers outbreak saw global shares drop 1.4% but then bounced back 35.5%.

Of course there can no guarantees, but there is no suggestion that there won’t be a similar occurrence with the coronavirus.

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