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Coronavirus – What are the risks to the financial markets?

Updated: Mar 3

Since the outbreak of the coronavirus, which became official during the 4th week of January this year, financial markets initially found it difficult to “price in” the risks and many would say they still are!

I would like to begin with just a brief summary of what has happened so far and how the markets have reacted since 20th January 2020, when news first broke about the virus being an issue.


As I write this blog the current death toll lies at 1369 and over 60391 confirmed cases of the infection. Data reads that this virus has killed more people than the SARS outbreak in 2003, a number that is obviously going to rise. So why are some stock markets trading at or close to all-time highs, when this virus is looking like it will be far worse than 2003 and we haven’t yet reached “peak infection”?


Let’s look at some numbers to compare China back in 2003 and where we are today.

Source for deaths and infections: Worldmeters


We have to take these figures on face value and by that, I mean; much has happened since the first recorded coronavirus victim in December 2019, China and the US have come to some agreements over trade tariffs, economic data has been strong and there looks to be a more clear solution to BREXIT than there was at the beginning of December last year.


Notwithstanding the “good news” it seems that investors have yet to price-in the possible impact that the coronavirus might have on the Chinese economy and bearing in mind the size of the current China economy, how this might impact the financial markets, globally. The comparisons are not only worlds apart in economic terms but also in the measures that China has put in place since the end of January.


The scale of the 2020 “shut-down” of business/travel and services is dramatically different to that taken by the Chinese government in 2003. Whilst both outbreaks appear to have encompassed the Chinese New Year holiday, the impact in 2020 is likely to dwarf that of 2003. In 2020 Chinese officials, in a desperate attempt to contain the infection, effectively brought some major cities to a standstill, telling the population to avoid any unnecessary travel during the New Year celebrations and where possible to simply remain at home. This is the busiest time of the year for nearly every sector of the Chinese economy. It is difficult to imagine what this might be like to live with, let alone the impact that it may have on some parts of the economy.


Since the outbreak, the Chinese government has issued a number of financial measures to help soften the effects that the virus might have/had on the economy. The impact, whilst hard to predict, should not be underestimated. Can you imagine London in lockdown; empty shops, empty restaurants, no one in theatres, cinemas, bars, trains, even work. The list is endless and as such the impact is unfathomable!


Some commentators have said “There are so few people infected, why all the fuss?” But of course this is nothing to do with how many people end up with the infection or the mortality rate of the virus. It will simply boil to what impact the shut-down has had on people’s spending, the GDP of China and the rest of world during this time, which I would add, is still ongoing.


China’s impact on the work has grown immensely over the last 16 years, not only in the spending power of its population but also its ability to manufacture the goods that we all consume at a rate of knots, plus the resources required to fuel this demand. There are very few industries globally that do not rely in some way on a Chinese firm being involved at some stage of their business process.


Caution

So investors need to be cautious, when we still have very little idea of the monetary cost that the coronavirus has already had on the global economy, let alone what the future might hold.

Just last week Burberry announced the temporary closure of 24 shops and the shops that remained open had reported a 75% drop in business levels.

There will be others and analysts call the money that has been lost as “unrecoverable revenue” as in you can’t go back and buy the meal you would have taken in the holiday period.


Dates to watch for

Sectors to watch

Travel / Airlines - most of the major Western airlines have cancelled their flights to and from China, and most if not all Chinese group travel abroad has been suspended.


Tourism - 2003 SARS outbreak had a very sizable impact, as tourist flows to the US, Japan, and Germany fell by an average of 60% relative to the pre-outbreak level.


Luxury Goods / Cosmetics names


Oil Producers – although oil prices will tend to react when inventories are released each week


Car manufactured exporting to China – reduced demand


Pharma / Biotech companies that are working on a vaccine – the timescale for this v SARS is much quicker and the reactive policy response in China should keep the cases contained, opposite of what the news is reporting. Most scientists estimate peak infection rates to be in 2Q which in turn will put further pressure on global growth – in particular transportation, accommodation, wholesale trade, and retail trade.


Conclusion

Markets will try to price in the affects of the coronavirus and current estimates are expecting China GDP to drop by 2% for quarter 1. But the global economy is a different place to that of 2003 and whilst predicting the future might be easier with all the technology we now have at our disposal, predicting how this will affect the global economy is in my view an altogether different prospect.


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