It is as hard to answer this question as it was in 2002/3 for the SARS virus, 2003 and 2009 for the Iraq war as well as the 2004 impact of the Tsunami in Japan, solely because it is difficult to be mindful of human loss and be concerned with capital gains.
What is the current spread/impact of the virus; How have previous conditions affected markets; how will markets be affected now; where are there silver on the clouds?
Current state: At the time of writing there were over 7700 cases of the virus (already more than SARS), with over 100 outside China, in 14 different countries. Respectable media outlets have produced a mushrooming gif of the growth globally, which, at first, looks very alarming. The University of Lancaster estimated that only 5% of infections in Wuhan had been found, and the number could leap close to 200,000 by early February.
There are conflicting studies regarding the outbreak with some research showing the virus has been around for longer than stated, and as such, unconstrained. The impact of that could be significant. For example, the very first patient (patient zero), along with 13 others, had no link to the seafood market in Wuhan where the original outbreak was deemed to be from.
Consider that unlike the Flu virus which has a reproduction rate of 1:1.4, this virus has a reproduction rate of two to four people for each case. If it has been around before being spotted, this could be very serious indeed.
The fatality rate however, is about a third of SARS.
Previous viruses’ impact on markets: Back then in 2003, the Hang Seng index still fell 4% c5 months after the outbreak, and given that stock markets don’t really look more than six months ahead, this may be why some Asian markets have responded by repricing so quickly.
What (correctly) happens in society is that humans avoid contact and travel, and non-essential items become what they are – non essential. Why gamble, buy nice pretty cars, spend money on duty free, travel? Airline traffic in China halved with SARS and Singapore/Hong Kong travellers dropped by 66%.
We know that markets responded very quickly after it cleared (two to three months) and the ‘postpone effect’ meant travellers did what they wanted to do very soon afterwards, so equalling back to normal travelling numbers, and markets responding like a stretched rubber band.
What we hope is that Mr Ghebreyesus from the World Health Organisation is telling it straight, saying that China had ‘scale, speed and efficiency’ to deal with the virus, and that it would be contained.
That hasn’t protected markets. In the early aftermath, the Hang Sang had dropped 5.5% in the week and Taiwan’s stock benchmark at 5.8% loss. Apple supplier Foxco dropped 10% as factories closed across China for another week. European stocks remained reasonably benign for now at a 1% fall.
The US meanwhile raised its level of alert to avoid non-essential travel.
Let’s remember China is powering global growth. Google it. Look at how they despairingly describe China’s growth at ‘just 6.1%’ for the year. Any movement in growth away from levels the UK/US would faint at the site of, signals serious wobbles. It is the powerhouse.
Cathay Pacific halved its flights into China and British airways has blocked out sales until March, meanwhile Hyundai and Toyota have kept their plants shut.
Chinese customers represent 40% of global spending on luxury items. No surprise their prices have nosedived, and with a sector trading at 25 times its earnings, it’s at ‘dotcom bubble level’ and hard to see why it can have any bouncebackability afterwards.
Remember, some institutions use this as a chance to dump their bad news, and hedge fund managers use it as a dream ticket to create volatility and sell shares short.
In the meantime, a prolonged impact on markets will serve the healthcare market very well. Hand sanitisers are already empty, and, as useless as face masks are (the filters aren’t tight enough), demand is off the scale.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
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