The novel Coronavirus (2019-nCoV), which was first detected in Wuhan, China, in mid-December 2019, has sent a chill down a spine of the globe. This is a contagious virus, which causes respiratory infection 2019-nCoV acute respiratory disease. Official Chinese death toll reaches 636, confirmed cases at over 31,000. Close to 60 million people remain under lockdown in China, with three cities reporting more than 1,000 confirmed cases each. More than 60 people on-board the cruise ship docked at Yokohama of Japan tested positive for Coronavirus. New Coronavirus cases have been confirmed in Singapore and Taiwan. Vietnam has at least two confirmed cases. The third case of Coronavirus has been confirmed in Italy and the UK. In the US, Pentagon has readied additional Coronavirus quarantine housing in the US; so far there are 12 cases in America. India has so far reported three confirmed cases of the virus. The total number of cases in Germany is 13. Clearly, the Coronavirus outbreak is not a global over-reaction, as people die. The growing death toll and economic damage from the Coronavirus outbreak have the potential to snuff out the rally in financial markets. The Finapolis analyses this development and looks at what it holds in store for financial markets.
Though Coronavirus problems appeared in December of last year, its full potential has only been understood in 2020. Later part of January coincided with the outbreak of epidemic Coronavirus. While it started in Wuhan state in China, it has spread to other parts of the world. There has been restriction on travel especially to China and nearby countries. China would be impacted by closure of factories, offices as well as consumption taking a hit with people staying indoors. The global supply chain for most products is also linked to China. This can cause disruption globally with India impacted as well, depending on how long it lasts, says Atul Kumar- Head Equity, Quantum AMC. As per IHS Markit, PMI data indicated global growth to have hit a ten-month high in January, but the Coronavirus poses a key threat to the near-term outlook. Markets will be eager to assess virus developments to gauge the impact on growth.
IHS Markit Principal Economist Bernard Aw says: Escalating concerns over the economic impact of the Coronavirus will bring China’s January data into focus next week, while investors will monitor further developments out of China, including any new measures to contain the virus."
The Coronavirus outbreak that started in China could certainly be considered an unexpected market shock, one which looks to remain a concern for a while longer. Seasonal flu is a familiar threat to health, but Coronavirus health situation is not just any flu. Remember how SARS (severe acute respiratory syndrome) first struck in late 2002 and left a trail of deaths. The outbreak of nCov (novel coronavirus) is creating havoc in China and heightened concern across the globe. The World Health Organization (WHO) has officially declared it a global health emergency. The number of Coronavirus cases has now officially crossed during the SARS epidemic. The situation remains troubling and fluid, say Franklin Templeton Multi-Asset Solutions’ Ed Perks and Gene Podkaminer.
"We maintain that the broad global macroeconomic backdrop is improving, notably as growth is stabilizing. However, we acknowledge that the nCov episode is making the stabilization process much more difficult, and noisier," say the Franklin Templeton experts. They expect growth to experience an immediate hit in the first quarter of 2020, especially in regions most directly affected by nCov like China.
For reference, the SARS outbreak impact on China’s economy included slowing gross domestic product (GDP) growth from an average of 10.5 per cent quarter-over-quarter (q-o-q), seasonally adjusted (saar) growth pace in the four quarters through the first quarter of 2003 to 3.4 per cent q-o-q saar in the second quarter of 2003.
However, there is also an expectation that a V-shaped recovery can take place once the episode passes that should be supported by additional counter-cyclical policy measures.
China's global influence
China’s influence over the world, particularly the Asian region, has dramatically increased over the past two decades. China has a large influence on global supply chains and accounts for an increasing amount of tourism. Any sort of slowdown in China will likely have ripple effects throughout the region.
"...the main channel of economic disruption, at this stage, is largely via reduced tourism flows (in/out of China), reduced import demand from China (we expect import growth in China to fall from +3.2% in Q4 to -4% in Q1)—particularly of consumption goods—restrictions imposed by third countries to avoid the virus spreading, and confidence effects," says UBS Investment Bank global economist Arend Kapteyn.
Global share prices have so far been relatively immune to the spread of Coronavirus, but how long will this nonchalant attitude remain is difficult to predict. Assets most exposed to China have suffered. Currencies of economies integrated with China's supply chains have weakened. Prices of commodities, of which China is usually a big buyer, have of course slid.
As of now, the new Coronavirus outbreak will be worse for the global economy than the 2003 SARS epidemic was, IHS Markit predicts. Though people would like to remind that Coronavirus is China-specific trouble as of now, China is important for the world economy. The country has been the main growth driver worldwide. The International Monetary Fund (IMF) estimates that China alone accounts for 39 per cent of global economic expansion in 2019. Plus, China now commands 16.3 per cent of the world’s GDP. This means if China catches a cold, the whole world sneezes.
"Since the duration and seriousness of the outbreak is still highly unpredictable, there could be a large margin of error to our base case forecast above. If the Coronavirus is contained only in Q2 (as warmer weather helped to contain the SARS outbreak in May-June 2003), and presumably travel and transport restrictions will last longer (even if not as restrictive as now), the negative impact on the economy will be greater and time for policy offset will be shorter. In that case, we see China's GDP growth fall below five per cent in 2020," says Dr. Tao WANG, Head of Asia economics and Chief China economist of UBS Investment Bank.
The biggest worry of global markets should be that Coronavirus' rate of infection is not slowing. While China and other countries are ensuring sweeping efforts to contain the spread of the virus, confirmed cases continue to rise. It is already close to 32,000 globally and still counting. As flights get cancelled, factories closed, and factories shut, global supply chains can be in deeper disarray than previously thought.
Much is unknown about the Coronavirus. Scientists know very little about Coronavirus lethality and transmission routes. The World Health Organization (WHO) has said it is too early to call a peak in the outbreak. There are currently no treatments for 2019-nCoV, but some feel that SARS vaccines could be a temporary solution. A SARS vaccine was developed in response to the 2002 outbreak, but was never sold since public health measures got the disease under control before it was ready. So, there is no proven track record about the efficacy of such SARS vaccines.
Hope against hope
Hitesh Jain, Lead Analyst, YES Securities, feels that although the health scare is nothing short of a black swan event, the anxiety and fear in the financial markets will be a short-lived affair, going by the past crisis.
The restrictions on travel in Wuhan and other cities of Hubei province will dent consumer spending, especially during the Chinese New Year Holidays. However, the impact is deemed to be temporary. During a similar epidemic in the past (SARS), the economic impact was very short-term in nature, with the health-scare induced slowdown not persisting for more than 3-4 months, hopes Jain.
Recent history is of credence that volatility in asset classes eventually subside. As a case in point, SARS and Swine flu episode did create jitters, though markets surmounted such concerns eventually. "Moreover, it is inconceivable for funds/investors to shift/re-balance asset allocation strategy, primarily on epidemiological grounds," said the YES Securities expert.
There are indications that gold could gain fervor if the Coronavirus situation becomes more challenging. Sunilkumar Katke, Head - Commodities & Currency, Axis Securities, said on February 6 that "coming from the week-long Chinese New Year holiday, Gold surged above $1,590 internationally and Rs41,200 mark domestically on the outbreak of 'Coronavirus threat' across China and other countries, driving safe-haven appeal for the yellow metal above the riskier assets."
All eyes are on interest rates. "The geo-political risk has moved from US-Iran to China WRT to Wuhan – Coronavirus. As of now the risk of a global slowdown is increasing i.e positive for interest rates," says Kotak Mutual Fund. "The RBI believes that the outbreak of Coronavirus in China is likely to affect the global trade and tourism industry in India," argues Abhishek Bansal, Chairman, and Managing Director, Abans Group of Companies.
The writer is a journalist with 14 years of experience)