The coronavirus has been described as "public enemy number one" the World Health Organisation. Is it the same for global markets? Guy Stephens explores the investment consequences of the outbreak
We all know that no news travels as fast as bad news. There is a reason why the rapid distribution of a news item is referred to as ‘going viral' but for the first time, the synonym and the subject are the same thing. It, therefore, matters more than ever, when assessing the impact on investment markets, that we cut through the media frenzy and establish what the facts are.
The rational reaction is to refer back to precedent such as SARS or Swine Flu and conclude that this will pass, the headlines will move on and the markets will recover. There may be some economic impact, principally in China, but if this outbreak persists and leads to lengthy shutdowns of manufacturing facilities, exports to the west will be affected.
You can see the knock-on effect globally. The markets are pricing some of this in as we write, with the European equity markets down 2%, following other markets overnight. The obvious suspects are being marked down, such as airline stocks, leisure, such as cruises and hotels. SARS reportedly impacted Chinese GDP by 2% in total. This is all very rational, probably justified, and in this environment of very imperfect knowledge, reassuring that the markets are not panicking.
The key differentiating feature here is that the virus can be spread before a sufferer shows any symptoms, unlike SARS, where quarantining those with symptoms stopped the virus from spreading.
In situations like this, we would always prescribe caution when events are still unfolding until the facts are established. However, when there is an event that has the potential to move markets, we remain vigilant and will continue to watch events closely.
As China has developed economically, the ability of its citizens to travel around the country by air to visit family has dramatically increased. We can be sure there will have been a big drop this year due to the travel restrictions but much of this travel will be to the provinces, hence the reason why the authorities have shut down travel from Wuhan and two other major cities.
Even so, estimates are that 5 million people left Wuhan for the New Year before the travel ban. At the time of SARS 17 years ago, this feature would not have been anywhere near as significant as it is today - straightforward extrapolation implies 12 million would have ‘migrated' for Lunar New Year back then. In addition, if you weren't showing symptoms, then you were okay to travel. This time around we have no way of knowing how many infected people are amongst those 5 million seasonal travellers.
Looking deeper into the historical precedent data it is useful to examine what economic impact SARS caused, the countries affected and the degree. In 2004, according to figures from the Asian Development Bank, SARS impacted Hong Kong GDP by 4%, wiping out any growth, the next most affected was Singapore and Taiwan, both affected by 2%, whilst China and South Korea were impacted by 0.5%. Of course, 0.5% of Chinese GDP is a much bigger absolute number than 4% of Hong Kong GDP. Last year, Chinese GDP was almost 38 times the size of that for Hong Kong according to figures from the World Bank which means that if the effect of SARS was replicated, the absolute effect in US Dollars would be five times greater in China. This is why mining stocks are also feeling the pain because that has global aggregate demand implications.
Moving on to air travel with SARS, during the peak period of contagion control, international passenger arrivals fell by 65% in both Hong Kong and Singapore and by between 30-50% in the surrounding Asean countries, figures quoted by the Asian Development Bank. We hear that the number of passengers travelling into and out of the affected region have fallen by around 50%, so a similar pattern of behaviour, which eventually contained the SARS virus.
A significant point to note is the sharp drop in passenger numbers to Hong Kong - this could be significant if the new virus does continue to spread. Hong Kong has already suffered massively reduced tourist numbers due to the protests that took place there throughout 2019 and recent economic data including Purchasing Managers' Index (PMI) numbers from Hong Kong have been weak, indeed it entered recession in the third quarter of 2019. The Hong Kong economy, already fragile, would be especially vulnerable to any fall in visitor numbers due to the outbreak of this virus.
To conclude, we remain vigilant but the importance of these events on markets remains unclear. Like many of these styles of events, although markets in the short term can react and indeed in many cases overreact, over the long term the effect they have has been insignificant. Markets are now reacting with the FTSE down and US futures also in negative territory following further falls in China and Hong Kong overnight, but what the long-term impact could be remains unclear.
Guy Stephens is technical investment director at Rowan Dartington
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