Coronavirus: the financial risks

07 February 2020

5 minute read

The coronavirus has been grabbing the headlines and moving the financial markets over the past couple of weeks. While the virus is clearly a tragedy on a human level, it also has ramifications for global output and consequently investors. However, do the financial effects of the virus presage an economic slump or a buying opportunity?

The World Health Organisation declared the virus as a global health emergency on 30 January. At the time of writing this article, the death toll has risen above 600 people, while the number of confirmed cases has surged past the 30,000 level. Alarmingly, the infection rate for the coronavirus is reported to be doubling every five days, with few signs of it slowing down.

Coronavirus is not SARS2

Markets have inevitably looked to the 2003 Severe Acute Respiratory Syndrome (SARS) outbreak as a comparison given it is from the same family of viruses. SARS killed 800 people, infected over 8,000 more and took 6-7 months to be contained.

There are a range of reasons to believe that the impact of coronavirus impact will be different to the one that SARS had. Chinese authorities quickly took measures to try and contain the spread of the coronavirus from Wuhan, where it first emerged, including stopping public transport, shutting offices and factories and extending the lunar new year holiday.

It could also be argued that China, and the world, is better equipped to deal with medical emergencies due to the greater sharing of information and improvements in medical protocols than was the case when SARS struck.

While the contagion rate for the coronavirus appears to be higher, so far it has been less deadly. Mortality rates for the coronavirus have been running at around 2.2% while the rate for SARS was closer to 10%.

Financial effects of the virus

The economic impact of the coronavirus is difficult to quantify and will likely be determined by its lifespan, intensity and geographic spread.

We estimate that the coronavirus outbreak could knock 80 basis points (bp) to 220bp off Chinese gross domestic product in the first three months of 2020. However, most projections point to a recovery in the second half of the year. As such, Chinese GDP growth is expected to be 10bp to 130bp lower than was expected in 2020. So while the economic impact is likely to be material, it should be resolved relatively quickly.

Disruption concerns surrounding the virus have reduced investors’ risk appetite in recent weeks. Equities in Europe, the US and Asia have all registered significant falls since the outbreak was reported. The strongest selling was inevitably seen in Chinese stock markets, which reopened after the holiday season, on 3 February, with declines of around 8%.

Barrage of selling

Sectors that are reliant on Chinese demand or its supply chain have felt the barrage of selling. Restrictions on the movement of goods and people hit sentiment around the transportation sector hard, particularly the airlines and cruise operators.

The Middle Kingdom’s consumer accounts for a third of all luxury goods sold, hence the weakness in sellers of designer brands. The country is also the largest importer of crude and industrial metals, therefore commodity prices and related stocks also slumped.

Time to buy?

While the short-term impact of the coronavirus is unclear, the longer term outlook for China remains positive as it marches towards becoming the world’s largest economy sometime over the next 40 years or so.

History teaches us that epidemics over the past few decades have had a limited long-term effect on growth and aggressive drawdowns and are often followed by equally impressive rallies. For medium-term investors, the country remains attractive from a growth and valuation perspective and recent weakness may prove to be a good entry point.