The outbreak of novel coronavirus in Wuhan, China, and in pockets
around the world has garnered significant public concern, and the global financial
market is on edge. We have received numerous questions about the potential impact
to investors and how the economic effects of the coronavirus might compare to past
outbreaks such as the spread of SARS (Severe Acute Respiratory Syndrome) in 2003.
Below, we seek to answer those questions, given the best information that we have
at this time.
Ten Chinese cities with around 30 million people have been placed in lockdown in an effort to contain the coronavirus.1 The speed that the disease spreads is alarming and reminiscent of the spread of SARS back in 2003. As of last week, five weeks after the first reported case, the coronavirus had infected over 2,600 people globally with 56 deaths,2 and the number has continued to grow since then. Cases have been reported in the United States, France, Australia, Japan, Malaysia, Nepal, Vietnam, Singapore, South Korea, as well as China itself
The global financial market has been concerned by the growing
number of coronavirus cases and fatalities. Last week’s confirmation by Chinese
authorities that the coronavirus had indeed spread from human to human pared 2.8%
from the Hang Seng Index (HSI) on Jan. 21.3
With hundreds of millions of Chinese people traveling during
the Lunar New Year, there are understandable concerns that the outbreak could potentially
spiral into a pandemic in the coming weeks. One positive factor is that the Chinese
government has tried to mitigate these circumstances by prohibiting travel and cancelling
many of the official festivities scheduled to celebrate the Lunar New Year. But
given that traveling activities are still likely to remain at a relatively high
level until a week after the official holiday ends, and that the incubation period
of the new virus appears to be around 10 days or more, there is a possibility that
new cases could continue to be reported at least until mid-February. In our view,
this suggests that financial markets may be affected by first-quarter growth concerns
in China, Asia as a whole, and perhaps even globally.
the investment implications?
Historically, major episodes of contagion have impacted economies
and markets. For example, the SARS outbreak in 2003 had a material but relatively
short-term economic and market impact.
The SARS epidemic, which originated in China’s southern Guangdong
province from animal sources, lasted approximately six months before containment.
It infected 8,096 people across 29 countries, causing 774 deaths.4 SARS
had a significantly negative impact on the Asian economy, especially in the tourism,
food and beverage, retail, airlines, casinos, and property sectors. For 2003, GDP
growth fell about 1% for China and slightly more than 2.5% for Hong Kong.5
We would note that an outbreak’s effect on market confidence
can far exceed its actual impact; the annual US and global influenza death toll
is thought to average about 56,000 and 646,000 respectively, yet hasn’t impacted
market confidence in the same way that SARS did.6
our outlook on the situation?
Although there are similarities between the two outbreaks, especially
in the transmission patterns, there is currently no evidence that points to the
coronavirus being more contagious or more deadly than SARS.
On the negative side, the Wuhan coronavirus does appear to have
a significantly longer transmission period. While the incubation period for SARS
was 2-7 days, the incubation period for the Wuhan coronavirus has been reported
to be approximately 10-14 days. In addition, Chinese health authorities have indicated
that the coronavirus can be spread by people who do not yet exhibit symptoms, which
could complicate tracking, quarantine, and ultimately containment.
On the positive side, the Chinese government’s response to this
crisis has been much better, in our view. For example, during SARS, Beijing tried
to block an investigation by the World Health Organization (WHO) and stifled all
media reporting of the mystery illness for months. This time around, government
officials have acted more transparently and aggressively. Authorities have already
published the genome of the coronavirus, and the Chinese Communist Party declared
that any official trying to cover up infections would be marked a “sinner of millennia”
to the Chinese people and party.
More importantly, Chinese health care service providers have
learned and improved notably over the past 17 years and are much more sophisticated
in their ability to handle the viral outbreak. With more transparent communication,
better public preparedness, and upgraded health care services, there is a strong
case to be made that the current outbreak could be more quickly contained than the
six months it took for SARS.
In addition, China is reportedly restricting foreign travel,
which could help contain or at least reduce the geographic spread of the virus and
limit its transition from epidemic to pandemic. From an economic perspective, the
draconian measure of quarantining cities and restricting travel may have an immediate
drag on services activity and regional consumer confidence — but limiting the spread
of the disease would promote the eventual normalization of economic activity.
The economic impact of the virus is very hard to quantify as
it depends on various factors including scale and geography of the contagion as
well as effectiveness of the containment policy of the Chinese and other authorities.
However, we believe the Chinese economy is likely to be more greatly impacted by
this new virus, all else being equal, given that the economy is more dependent on
consumer spending now than it was in 2003 at the time of the SARS outbreak.
There are signs that aviation and tourism industries in China
have been negatively affected — the spread of the virus is occurring at the advent
of the Lunar New Year, which makes it even more impactful — and it is clear this
could worsen as it spreads. This is what happened when SARS hit Singapore in March
2003. Singaporeans panicked — people stopped going out to shopping centers to avoid
a crowd and watched TV all the time to understand the latest updates on SARS. While
they curtailed spending on almost everything else, they ramped up spending on food
and other necessities for fear that the supply would be disrupted due to a spread
of the disease. People wanted to avoid riding on trains and buses, which created
a long waiting line to ride a taxi. Fortunately, the panic ended after several weeks,
and people’s lives returned to normal.
today’s economy different than in 2003?
The experience of SARS suggests that this new coronavirus could
cause a substantial decline in consumption activities (except buying necessities)
and a sizeable drop in business activities, as well as a decidedly risk-off sentiment
in the market. In gauging the macroeconomic and market responses, it would be useful
to factor in differences in the structure of the Chinese and global economies today
- Today, China’s outbound
tourism is a far larger factor than in 2003 for both Asia and the world as a whole.
Indeed, China has rebalanced significantly from manufacturing and net trade to consumption
and services as a source of economic activity.
- Back in 2003, China was
explicitly pegged to the dollar and much of Emerging Asia was engaged in considerably
more exchange rate management; today exchange rates are generally closer to free
floats in much of Asia, and China formally manages against a near trade-weighted
currency basket — all of which suggests that exchange rates may weaken as part of
- Finally, the global economy
in 2003 was in a much earlier phase of the business cycle in most major developed
and emerging economies, and global integration in trade and investment was accelerating
rather than in danger of partial fragmentation — which would arguably have been
considerably more supportive. Indeed, the manufacturing and consumption cycles would
probably have been more supportive, whereas at present, an acceleration of this
epidemic could put additional pressure on global growth via consumption and services
on the heels of the recent deceleration in manufacturing, investment, and trade
- The monetary policy position
was also quite different: major central banks have turned accommodative, whereas
policy easing had already run its course by 2003 and would begin to gradually normalize
by 2004, once the growth recovery was fully underway; now however, with rates at,
near, or even below zero, monetary policy space is widely seen to be limited.
- In addition, many asset
valuations are now richer, especially in the US, and had been performing strongly
with the pivot by the Federal Reserve and other major central banks toward easing
and improvement in US-China relations leading up to the Phase I trade deal.
we expect from markets?
We expect stock prices to continue to fall in China and other
Asian markets and, to a lesser extent, globally. We also expect lower oil prices,
higher gold prices, and a likely appreciation of Japanese yen against the US dollar.
The market reaction may deepen further if the virus spreads
further. The most recent revelation of new infections in China and elsewhere suggests
that the market will be faced with further downside risks. But when the coronavirus
is successfully contained, we believe the situation should normalize and financial
markets are likely to stabilize.
It is important to stress that the Wuhan coronavirus is unlikely
to change economic fundamentals. However, it is worth noting that a recent research
report from Societe Generale estimates that if the spread of the coronavirus “fails
to stabilize” by March, first-quarter GDP growth for China could fall below 6% (annualized).7
However, we would not be overly concerned if that scenario were to come to fruition
given that, once the situation does stabilize, we are likely to see a significant
improvement in GDP growth given that the signing of the US-China Phase 1 trade deal
should spur an improvement in consumer and business confidence — and spending. It
would just be delayed by the spread of the new coronavirus, but we could envision
a coiled spring in terms of spending triggered once the new virus stabilized.
our resulting investment strategy?
Investors who have
concerns about the market impact of the coronavirus should consult their
financial advisor for advice specific to their risk tolerance and financial
objectives. But in general, we believe that investors with longer time horizons
may want to stay the course and maintain their current allocations, as history has
shown that health scares and their impact on markets are very short-lived.
Those with a short time
horizon may want to talk to their advisor about supplementing their portfolio
with “safe haven” asset classes such as gold, US Treasuries and low volatility equity
the risks to our view?
It is important to look
to history to understand the likely impact of a contagious outbreak on markets.
Our observations, based on analyses of previous epidemics/pandemics, are:
- It usually starts with a bit of concern
but relative complacency during the initial outbreak. Markets have tended to fall
- Once the outbreak spreads internationally,
threatening a pandemic, a form of panic ensues. This is typically what happens when
cases arrive in the US and Europe. Markets take it more seriously, and significant
corrections have occurred. In particular, any stocks linked to travel and leisure
have tended to suffer: airlines, shipping, travel companies, and oil have typically
fallen. Safe havens such as gold and US Treasuries have tended to perform well,
as concern spreads about the economic impact.
- Economic activity normalizes and markets
recover as the authorities contain the spread of the disease.
It seems as though we are reaching the end of Phase 1 and
are on the cusp of Phase 2 (assuming the news worsens).
This comes at a time when equity markets have had a very
strong rally — and this
could be the catalyst that causes a correction. In a worst-case scenario, global
equities could fall by as much as 10% to 20% before recovering. We will be following
the trajectory of this contagion very closely for signs of stabilization. The longer
the coronavirus spreads without government authorities being able to slow its spread
and stabilize the contagion, the more impactful it will be to economies and markets.
However, we would expect a fairly swift rebound as the contagion improves, particularly
given the accommodative central bank environment supporting risk assets.
With contributions by David Chao (Global Market Strategist, Asia Pacific), Tomo Kinoshita (Global Market Strategist, Japan), Paul Jackson (Global Head of Asset Allocation Research) and Arnab Das (Global Market Strategist, EMEA)
1. Source: Associated Press, “China expands lockdown against virus, fast-tracks hospital,” Jan. 24, 2020
2. Source: Associated Press, “China expands lockdown against virus, fast-tracks hospital,” Jan. 24, 2020
3. Source: South China Morning Post, “Hong Kong and China markets rebound as investors make most of Wuhan coronavirus-led declines to increase positions,” Jan. 22, 2020
4. Source: Centers for Disease Control and Prevention, “SARS (10 Years After)”
5. Source: National Center for Biotechnology Information
6. Sources: Centers for Disease Control and Prevention, MedicineNet.com
7. Source: The Wall Street Journal, “Deadly Infection Keeps Chinese Consumers From Spending,” Jan. 26, 2020
image: d3sign / Getty
involves risk, including the risk of loss.
the price of gold and precious metals may affect the profitability of companies
in the gold and precious metals sector. Changes in the political or economic
conditions of countries where companies in the gold and precious metals sector
are located may have a direct effect on the price of gold and precious metals.
securities are backed by the full faith and credit of the US government as to
the timely payment of principal and interest.
There is no
guarantee that low-volatility stocks will provide low volatility.
Safe havens are
investments that are expected to hold or increase their value in volatile
A free float is a
system in which the exchange rate for a country’s currency is determined by the
supply and demand, rather than government intervention or other forces.
currency basket is a collection of currencies whose combined value is weighted
to reflect the importance of a country’s trade relationship with each of the
countries issuing the currencies.
The Hang Seng
Index is an unmanaged index considered representative of the Hong Kong stock
market and includes the largest companies traded on the Hong Kong Exchange.
referenced above are those of the authors as of Jan. 27, 2020. These comments should not be
construed as recommendations, but as an illustration of broader themes.
Forward-looking statements are not guarantees of future results. They involve
risks, uncertainties and assumptions; there can be no assurance that actual
results will not differ materially from expectations.