Rising cases and market downfalls 

On December 31st 2019, China first alerted the World Health Organisation (WHO) to several cases of an unidentified pneumonia-like virus. Many of the infected were linked to the Huanan Seafood Wholesale Market in Wuhan, the capital of the Hubei province.

When the first death was reported on 11th January 2020, two days after the 61-year-old man afflicted had passed away, there were still only 42 confirmed cases of the virus. Investment markets paid little attention to the news, especially considering that the deceased was already suffering from abdominal tumours and chronic liver disease.

But as the virus began to spread to wider parts of China, and Wuhan was placed under effective quarantine, investors started to grasp that this outbreak could have a damaging effect on China’s economy. Chinese markets began to drift lower, giving up some of the gains seen since the start of December.

However, it was on January 30th, when the WHO declared Coronavirus to be a ‘global emergency’, that investment markets around the globe took note. There was an 8% fall in the Shanghai Composite Index, and c.2-2.5% falls around other developed markets.

While Chinese markets subsequently began to recover, recouping that 8% one-day fall by mid-February, the downturn in developed markets was very short-lived. Markets in the UK and US recovered within days as bargain hunters saw an opportunity to purchase stocks at depressed prices.

Assessing the economic impact
Comparisons are being drawn between Coronavirus and the outbreak of the SARS virus in 2003. However, regarding the current situation, there have been many changes over a brief timeframe which suggest, from an investment standpoint, that this is unlikely to be a case of history repeating itself.

It is true that both viruses are spread in the same way, with face-to-face contact the most likely cause of infection. It is less than 20 years since the SARS outbreak, yet consumer habits have changed drastically in this relatively short time period. While online spending levels were virtually zero in China in 2003, they are now estimated to account for in excess of 35% of Chinese consumer spending. Therefore, residents being contained in their homes is unlikely to have such a marked impact on spending habits as it did in 2003.

As with any significant viral outbreak of this type, it is also important to consider the sectors of the economy that are most at risk. The biggest impact will be on those where a downturn in spending is pronounced during the pandemic and will not be made up at a later date. These include tourism, restaurants, brewers and gambling.

For example, at the start of February, Macau, the world’s biggest gambling hub, closed its 41 casinos for 15 days in order to help to limit the spread of the virus, costing the area an estimated $100m a day.

The inverse of this is sectors where spending is simply deferred temporarily until the virus is contained, for example technology, apparel and construction. Once it is, this will cause a sharp rebound in domestic demand, as happened with SARS.

Chinese strength and actions

Another key change since the SARS outbreak of 2003 is that China has substantially grown in its importance to the global economy. Its output has increased from less than 5% of Global Gross Domestic Product, to in excess of 15% today. As of 2019, China has been the major contributor to global growth for 13 consecutive years. Accordingly, the investment world is rather more focused on the potential economic impact this time around.

The Chinese Government is acting quickly to not only contain the spread of the virus, but also dampen the economic fallout. The People’s Bank of China has a number of policy tools at its disposal to help offset the economic pressure, such as sizeable liquidity injections, targeted financing, increased fiscal spending and interest rate cuts. We have already begun to see some of these being implemented.

The measures put in place to try and limit the impact of the outbreak seem to be based on sacrificing short-term pain (in terms of a short, sharp economic contraction, dampened where possible by fiscal support), for long-term gain. The hope being that this comes in the form of a quick recovery as soon as the virus is contained, and widespread damage is limited.

Viewed from a distance, some aspects of this approach to containment may seem rather draconian. However, from an economic standpoint, the measures are likely to help limit the longer-term impact. While market reaction and investor sentiment will also be skewed by newspaper headlines to a degree, stock market movements up to this point reflects an appreciation of the approach taken, especially considering the vital role that China now plays in the global economy.

What happens now
For those investing with us, our Investment Committee will continue to keep in close contact with fund managers and will keep clients informed if action is required. Your investments with Financial Advice Centre are already diversified over many different asset classes as well as globally and investment values should be measured over the medium to long term, allowing short term volatility to run its course.

If you, or anyone you know has further concerns or would like to discuss this - please contact us we would be happy to help.