Market reactions on Coronavirus, Is it overhyped?

Published on 04 Feb, 2020

The outbreak of the deadly coronavirus in China has already started affecting various business sectors either directly or indirectly. As the death toll in the country climbs, China is forced to take preventive measures and focus its efforts on people’s health and safety. Increased leaves in factories, along with decreased travel and shopping, are already dragging a few sectors down. Will these effects lead to a global downturn or will they be a short-term panic attack? What will be the impact of this virus on the world economy? We attempt to answer these questions in this article.

The coronavirus, originating from China, has spread to other parts of the world, and is a sinister reminder of the dreaded SARS epidemic that affected Asian countries in the early 2000s. An early alarm and proactive steps taken by the Chinese government have enabled other countries to contain the damage. However, since the virus broke out during the Chinese New Year, the main period of shopping and travel for the Chinese, several sectors and countries would be adversely affected at various levels. Stock markets across the world reacted negatively to the news of the virus outbreak, but resumed an upward trend immediately. The situation is evolving; the extent of the impact of the virus can be determined after the situation stabilizes.

Global markets nosedive as coronavirus spreads
The coronavirus outbreak is mainly concentrated in China. A report on the demise of people in the Hubei Province in late December 2019 led to the identification of this virus. Novel coronavirus (nCOV) is a new respiratory virus that was first identified in Wuhan (Hubei Province, China). The death toll in the country has risen rapidly since then, with the current count standing at 425 and the number of confirmed cases at more than 20,000 as of February 04, 2020. Moreover, the virus has spread outside China, with more than 190 confirmed cases. Other countries reporting confirmed cases of virus infection include the US, Hong Kong, Australia, Malaysia, India, Thailand, France, Japan, Singapore and South Korea. To safeguard their citizens, several countries are planning to evacuate them from China, while the US and Japan have already initiated the process. The WHO declared fast spreading coronavirus as a global health emergency, but at the same time opposed any restrictions on trade and travel against China.

The fear of the virus spreading and affecting the economies was reflected in the stock market reaction across the world, which saw a low-single-digit fall, driven by the increase in confirmed cases in the US. Even though Central Bank of China pledged to inject CNY1.2tn (USD 174bn) worth of liquidity through reverse repo operations, the Chinese stock market slumped and lost more than USD 400bn of value, with the Shanghai composite declining over 7.0% on February 3, its first trading day after the Chinese New Year.

The 10-year US Treasury bond yields tumbled 5 bps to 1.62, reaching their lowest level since October. Gold prices climbed 0.8% to USD 1,580 per ounce, as investors sought safe havens. Brent crude prices also fell 3% and was below USD 60/bbl

Initial Stock Market reactions to outbreak of Coronavirus (January 27th)

Source: Bloomberg * Hang Seng returns as on January 29th

Given that the coronavirus outbreak is in a very early stage, the market has not declined significantly as it awaits more clarity on the severity of this epidemic. Currently, the market seems to have factored in the initial concerns.

Mortality rate of Coronavirus significantly lower compared to SARS
Parallels can be drawn between nCOV and the severe acute respiratory syndrome (SARS) outbreak that occurred in China in 2003. In the early months of 2003, markets tumbled amid the outbreak of SARS, but eventually the major indexes reinstated themselves and were stable by the end of the year. The S&P 500 was down approximately 10% in the early months, but ended up rising more than 26% for the whole year. The new coronavirus is still in the nascent stages and not as aggressive as SARS. However, its cases are eventually expected to outnumber those of SARS, with a lower mortality rate. When the initial cases of SARS were detected in November 2002, the Shanghai stock market fell and returned to its November level in January 2003. It plummeted again in 2003 and the losses were recovered by January 2004. The Hong Kong stock market followed suit, first declining 16% between November 2002 and April 2003 and recovering all losses by July 2003.

Source: CNBC (As of February 4th 2020)

From an economic point of view, SARS slashed the Chinese GDP growth rate from 11.1% to 9.1% in Q3 2003. According to past data, market sentiment improved once the number of cases started decreasing.

The new coronavirus is a serious issue in China, but only two deaths (Philippines and Hong Kong) have been reported so far in other countries. Hence, in the short term, a severe effect outside China seems unlikely. Most countries are focusing on curbing the spread. The extent to which the Chinese economy would be hampered cannot be gauged yet, as the extremity of the virus is still unknown.

Thailand and Japan would be most impacted, apart from China, while other countries also face short-term pressures
Being the world’s second largest economy, China is connected to all the other countries directly or indirectly. Therefore, any slowdown in its economy would certainly put the brakes on global growth.

Factors such as cancelled tours, suspended flights, a momentary shutdown of restaurants, extended nationwide holidays resulting from the coronavirus outbreak have created havoc in China (Mainland). Sooner or later, several other geographies, especially Thailand, Japan, Hong Kong, and Singapore, would face a near-term economic downturn and prolonged nationwide trauma due to excessive precautionary measures.

Wuhan, referred to as "the Chicago of China," is the hub of transport and industry for central China and is the engine of growth for the world’s second largest economy. It is also the center of 300 Fortune 500 companies, including Microsoft and SAP. Wuhan registered GDP growth of 7.8% in 2019, even higher than China’s 6.5%. Currently, Wuhan is facing a complete shutdown, and all transport links to the city have been closed. This would mean China’s GDP growth would be slashed 0.5–1% against a forecast of 5.9%, as per EIU estimates.

China has recorded more than 6% of GDP growth over the last 10 years. Household income rose rapidly, which triggered foreign visits by Chinese people across the world. According to official figures, about 134 million Chinese visited foreign countries in 2019, an increase of 4.5% YoY.

Thailand is the most preferred tourist destination for Chinese people. Tourism accounts for roughly 18% of Thailand’s GDP. Between Thailand and China, there are more than 220 flights available per day. Moreover, approximately 40 million tourists visited Thailand in 2019 (up 7% YoY), of which around 11 million were Chinese (up 4.4% YoY). Any further spread of the dreaded virus would hit the Thai economy hard.

Japan is economically dependent on China as it is the country’s second largest export hub. The Chinese have unimaginable consumption power for Japan’s retail products. In 2019, Chinese accounted for about 30% of the tourists that visited Japan and 40% of the total value spent by foreign tourists. Japan may face more difficulties in handling the impact of coronavirus as it is going to host the 2020 Summer Olympics from July to August 2020.

As part of the phase one trade deal with the Trump administration, Beijing had pledged to purchase more of US products for several years. However, in the event of such an economic crisis, it seems unlikely that Beijing would be able to live up to its promise.

Luxury goods, airlines, automobile sectors to be hit severely, while overall healthcare sector stands to benefit in short term
The coronavirus surfaced in China during the most important period of travel and purchases, the Chinese New Year. We estimate that while most sectors would be impacted to some extent, certain sectors would face a material adverse effect in the short term.

We expect most sectors to be negatively impacted at various degrees. The travel and leisure sector, which includes the airline, luxury goods, and hospitality industries, would be directly impacted, while other sectors such as automobiles and electronics, for which China is a major hub, would also be indirectly affected. The key beneficiary in the short term would undoubtably be the healthcare sector.

It is too early to say the virus which has struck China’s economy, is leading to a dominoe effect across the globe. The virus-hit country is taking precautions to contain the virus and eliminate its risk. If it is successful in this endeavor, the affected sectors would slowly recover and the current impact on stock markets would balance out. We need to wait and watch.