The news that a new form of coronavirus had been identified in the major Chinese city of Wuhan was enough to send Asian stock markets into retreat. While in Europe, luxury-goods makers with Chinese order books also took a hit.
Despite the start of the Chinese New Year celebrations, which results in the largest human migration on Earth as millions return home to their families or travel abroad, stock markets were quick to move on, apparently due to China’s speedy response, which included a nationwide screening program.
According to local reports, the outbreak originated in a seafood market that also (illegally) trades in live wild animals, suggesting that the virus had jumped across from animal hosts. The new virus, christened ‘2019-nCoV’, has triggered memories of the SARS crisis in 2002, which infected more than 8,000 people and subsequently killed almost 800 people across Asia and elsewhere.
The impact of SARS on China’s GDP is hard to find. If you look for the impact on the stock markets, it was brief. Over the course of the outbreak, markets actually rose. So why do we pay so much attention to these things?
First, what is the likely duration? Well, it is probably likely to peak, in terms of cases, in March or April. The more virulent the virus, the quicker it burns out. That is why the comparatively less aggressive common influenza causes much more damage. In past years, the Center for Disease Control has estimated flu deaths in the U.S. alone at up to 80,000 in severe seasons.
Second, the cost to China’s GDP? Some workers will be out sick days, and some will succumb to the disease. However, as was the case with SARS, beyond the effect on a quarter or two of earnings for some businesses, the overall effects will be hard, if not impossible, to spot in the data.
Third, the impact on sentiment? Here it will be at its greatest. Why? Because U.S. newspapers always seem to overreact to any news out of China, good or bad. Also, the Chinese reaction itself can be extreme—add humans’ natural fear of disease and the fact that China has a weaker health system than the U.S., and you can see why the local population reacts with great fear. You can see why the government takes logical but perhaps heavy-handed steps to control the outbreak. All that plays to headlines and the impact on share prices is consequently exaggerated.
Forth, economic impact. Looking at the economic impact of the 2002/03 SARS outbreak and the 2005/06 bird flu epidemic, there was significant short-term economic impact, that impact faded quickly. There also wasn’t much impact on the Shanghai stock market.
During SARS, nominal retail sales growth slowed from 9.2% YoY in 1Q03 to 4.3% in May, but rebounded to 8.3% in June and was 9.8% in July and August. For the full year 2003, nominal retail sales were up 9.1% vs 8.8% in 2002.
GDP growth slowed from 11.1% YoY in 1Q03 to 9.1% in 2Q03, but rebounded to 10% in 3Q03. For the full year, GDP was up 10% vs 9.1% in 2002.
If the Wuhan Coronavirus can be brought under control in a similar timeframe as SARS was tamed, we expect the negative economic impact will be very modest over the course of the full year.
Content taken from Quilter Investors, Between the lines week 4 dated 24 January 2020 and Matthews Asia perspectives, Wuhan Coronavirus dated 29 January 2020.
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