Is the impact of the Wuhan Coronavirus being offset by better news elsewhere?
Comparing the current Coronavirus with previous endemics is likely to be misleading, as they differ in terms of the speed with which they spread, and the ratio of fatalities to the total number of people infected. Alarmingly, more people have been diagnosed with this new strain of Coronavirus (over 28,000) than SARS (about 8,000). Although the numbers continue to rise, so far fewer people have died as a proportion of total cases (around 2%, compared with around 10% for SARS). The high spread of the disease, but lower fatalities are likely to be as a result of advances in medicine and increased international travel. As such, it is difficult to predict the overall economic impact. Despite the differences to the SARS outbreak, many people still compare it with the current viral outbreak and have concluded that the impact will be short-lived, hence the relatively moderate influence on markets so far.
Following an extended New Year break, the Chinese market reopened on Monday and fell 8%. The People’s Bank of China injected 1.2 trillion yuan of additional liquidity to prevent further decline. This inflow of cash helped the market to recover slightly, and the Chinese market is now only 2.5% below the pre-holiday level. With many parts of China taking an extended New Year holiday, several factories were closed, resulting in a dip in commodity demand, particularly for oil. In turn, this may make meeting some of the commitments to buy more US agricultural goods, as part of the phase one trade agreement, harder to meet. However, shortages of electrical goods and parts manufactured in China may begin to have a wider impact in a couple of months’ time. For example, a car manufacturer may not be able to complete a car without a relatively small component made in China. In the long run, this may call into question the reliability of being overly dependent on long distance supply chains. However, memories may be short-lived and the expense of moving the manufacturing of parts elsewhere may not be worth the extra cost.
Looking at equity markets in closer detail, travel and tourism stocks have clearly suffered as a result of the Coronavirus, as have commodity stocks to some extent. Luxury goods brands, with a large proportion of sales into China, will also be hit. In the long term, anyone who sources goods or parts may suffer from a lack of supply. From a macroeconomic perspective, in 2018 China was around 16% of global GDP, but 35% of global GDP growth, so a 2% hit to Chinese GDP (it could be more or less than this) would remove around 0.3% from global GDP and 0.7% off the global GDP growth rate this year.
However it is not all negative news, the phase one US-China trade deal has been signed, and there has been better than expected economic data and company results. Reports from the fourth quarter earnings for the S&P 500 stocks have been flat rather than in decline, as had been predicted. The positives for global equity markets have so far outweighed the negatives, and as of Wednesday, the MSCI World Equity Index is up 2% this year.
Overall, it is a complex picture that needs careful monitoring. Economic data in the coming months may be sharply distorted by the closure of large parts of China. However, there are signs that efforts to contain the spread of the virus are beginning to work, on top of additional positive news elsewhere for equity markets.