Financial markets have fallen sharply on concerns of the coronavirus, a respiratory illness first identified in Wuhan, China, spreading globally. While the headlines have been worrying, and no loss of human life is insignificant, it is important to understand the facts. The framework we have adopted for discussing this virus is to consider the three components of a pandemic—contagion, severity and treatment—and how the evolution of those components can shift the market narrative.
As of January 30, there are approximately 9,776 confirmed cases. While China is the epicenter of the virus, there have been 118 confirmed cases outside of China in 22 different countries and regions. As a point of comparison, the SARS (severe acute respiratory syndrome) outbreak in 2003 lasted about 9 months, from November 2002 to July 2003, with cases spanning 29 countries. While Chinese authorities have responded by placing over a dozen cities on lockdown, there have been a number of challenges in preventing the spread of the virus:
- Chinese New Year: Inception of the illness occurred just before Chinese New Year, when an estimated 400 million Chinese take approximately 3 billion trips over the 40-day festival period.
- Incubation: The virus could have an incubation period of up to 14 days, meaning it could take up to 2 weeks before an infected individual presents symptoms, making policing the spread of the virus challenging.
- Airborne nature: The virus spreads via droplet transmission (coughs, sneezes etc.)
The rising contagion level is what seems to have triggered uncertainty amongst investors.
There is no clear information on the actual severity of the virus. As of January 30, there are 213 confirmed deaths related to coronavirus; however, there are few details related to these deaths (e.g. age of patients, additional complications, how quickly they sought medical help). Historically, severity levels have varied dramatically. According to the World Health Organization (WHO), of the 8,098 global cases of probable SARS reported, there were 774 deaths, or a 9.6% fatality rate; meanwhile, the Swine Flu outbreak in 2009 had a much lower level of just 0.03%. Historical analysis related to pandemics is somewhat limited as each illness has its own unique components and considerations.
One promising sign is that there are 187 reported cases of patients who have recovered and were discharged from the hospital. If severity does begin to rise along with contagion, then investor concerns may mount further as potential loss of life and economic damage rises.
Viruses, such as the coronavirus, are difficult to treat. It is possible to vaccinate against many viruses, but the development and roll-out of a potential vaccine can take time. At this stage, treatment options are relatively unknown, adding to investor uncertainty.
Economic and market implications
Last Monday, the Dow Jones Industrial Average fell more than 500 points, or about -1.5%, in the morning. Oil sold off about -3% and the U.S. 10-year Treasury fell to 1.61% by midday and have both since fallen further. At this point, the market is reacting to contagion, as we have seen identified cases rapidly increase. What may exacerbate or alleviate the market reaction is how treatment and severity evolve.
What we saw back in 2003 with the SARS outbreak was that it had the most significant impact on air travel, tourism, and domestic demand in Asia. Hong Kong, for example, experienced some of the most severe economic impacts, with its GDP growth falling by -0.5% y/y in 2Q 2003, and its retail sales declining by -7.7% y/y that quarter. China’s growth slowed to 9.1% y/y, and its retail sales, industrial production, and fixed asset investment suffered. However, these rebounded quickly as the new cases dropped and the Chinese government offered supportive economic measures. As highlighted in the chart below, U.S. equities fared better than stocks in EM Asia when concerns over SARS were rising. However, Asian stocks rebounded once concerns about SARS abated. This indicates that prevailing market conditions and fundamentals have a more prominent influence on returns. Unfortunately, the current environment is one of slowing global growth and earnings.
The coronavirus is likely to impact the economy and markets in similar ways, although perhaps to a greater extent. In China, for example, the nature of its economy has changed materially since the SARS outbreak, shifting from an industrializing economy to a more consumer and service-oriented economy. To complicate matters, this outbreak coincides with the Lunar New Year in China, the most important holiday for travel and consumption. As mentioned above, the estimated 3 billion trips taken over this period are likely to be negatively impacted by travel restrictions for 35 million people, and others canceling their plans. Already, travel was down -28.8% on the first day of Lunar New Year compared to the first day last year, according to the Ministry of Transport. Additionally, last year Chinese consumers spent nearly $150 billion in just the first week of Chinese New Year according to the Ministry of Commerce, but this year, with many confined to their homes, consumption may also drop. A few major multinational companies are temporarily closing factories in the region or re-routing supply chains.
Impacts to the Chinese economy, which has already faced headwinds from slowing global and domestic demand and external trade pressures, are likely to be the most pronounced, and are likely to elicit a policy response from the Chinese government. However, for U.S. investors, markets may be more likely to stabilize, as we have seen few protracted market declines due to health crises , geopolitical risks, natural disasters or political turmoil.
Equity performance during the SARS Outbreak
Price index, U.S. dollar
Source: Factset, MSCI, Standard and Poor’s, J.P. Morgan Asset Management.