On 7 January 2020, China confirmed that a novel form of coronavirus had been identified, named “2019-nCoV” (for 2019 Novel CoronaVirus) and could be linked to a series of illnesses including pneumonia in Wuhan City, Hubei Province of China in late 2019.
The coronavirus causes respiratory illnesses and “2019-nCoV” is likely to have affected thousands. Unfortunately, it is likely to increase as in comparison the SARS virus killed nearly 800 in 2003, swine flu 18’500 in 2009 and between 290’000 and 650’000 for the seasonal influenza virus according to the World Health Organisation (WHO).
What could trigger an economic impact is, however, not necessarily the number of deaths but rather the fear factor it creates and the constraints on the economic activity. Chinese authorities have so far taken stringent actions from locking down millions of inhabitants in Wuhan City to restricting travel within China and extending the Chinese new year holiday in order to contain a widespread outbreak of the virus.
The reaction has also been much faster than usual as there has only been three weeks between the notification of the first case to WHO and the first measures taken by Chinese authorities, versus 4 to 5 months in the case of SARS in 2003.
The global economic impact of the virus outbreak is difficult to estimate as it will depend much on the capacity of China to contain the virus given that most cases have been so far identified within China. The impact could be material this quarter but at the same time be compensated by a rebound in the following quarters.
During the SARS outbreak in 2003, China’s GDP growth fell from 10.5% in Q1 2003 to 3.4% in Q2 but rebounded 13.5% in the second half of the year, partially helped by a global rebound and specific measures taken by the Chinese government.
The fear factor and the market impact of previous pandemics have been limited in time. For example, the swine flu episode of 2009 started on 24 April 2009 but quickly faded as story counts regarding swine flu (or H1N1) peaked just four days later. In the case of SARS, it lasted around one month.
From a sector standpoint, travel, tourism and hotels in China may be under pressure in the short to medium-term as travel to and within China is either banned or limited and many cinema theatres and theme parks are temporarily closed.
During the SARS and swine flu episodes, Chinese stocks as well as airlines, luxury and textile companies underperformed the MSCI World index from the date of announcement of the virus outbreak to the peak in terms of news coverage. But they all rebounded strongly in the month after the peak.
The auto sector is indeed currently affected by the virus outbreak as several carmakers have suppliers or their own plants in Wuhan. The virus outbreak also resulted in a flight to safety, pushing interest rates lower globally, at the detriment of value stocks versus quality-growth stocks.
If previous pandemics are any guide for the new coronavirus outbreak, the long-term effect on the economy and on financial markets could, therefore, be moderate in scope.
February 03, 2020