• wblogo
  • wblogo
  • wblogo

Toll Rises From China's Coronavirus - Wealth Managers' Reactions

Tom Burroughes, Group Editor , 29 January 2020

articleimage

The rising toll from the Chinese coronavirus has spooked markets, making investors worry about disruption to global supply chains on which so much GDP depends, as well as closures of airports and other travel hubs. Here is a selection of reactions from wealth managers.

Global equity markets and others were hit hard yesterday as news reports showed that the deadly coronavirus in China had claimed more lives, prompting the country to impose draconian travel bans and other restrictions. The outbreak reminded investors of the SARs virus outbreak of almost two decades ago, and how it heavily disrupted transport and supply chains. Yesterday, European equities recovered slightly, but Asia was still under pressure. Spot gold prices rose to $1,585 per ounce on 27 January before easing off yesterday (source: BullionVault).

Coming on top of US-China protectionism and rows about intellectual property rights theft and other abuses, the Chinese virus will rattle investors already concerned that equity market valuations had become overcooked, particularly in the US. People may have wondered whether there were any “black swans” about to fly over the horizon this year, and it appears an early flock has arrived from Asia. 

All that said, information about the scale of what is going on is not easy to obtain, and not simply because Communist-controlled China heavily controls the media and non-domestic access. The flipside of an authoritarian state is that it can act decisively in ways that more liberal nations cannot. Making an investment judgement call is difficult. 

This publication will update on wealth managers’ reactions as they come in, and those who want to contact us should email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Here is a collection of comments from around the world. The regional diversity of comments is deliberate, precisely because this is a global issue, with international implications. (Of course, some of the commentaries may be out of date even by the time this article goes live, given how fast events are moving, so the usual caveats apply.)

Seema Shah, chief strategist at Principal Global Investors
Fears around the spread of the coronavirus are being reflected – violently – in global markets. The dynamics of how concerns about the virus translate into market movements are different to that of SARS back in 2003. Risk Velocity – the pace at which major risks and “black swan” events can affect asset prices – is elevated in today’s markets compared with 10 years ago for three key reasons.

Firstly, the rise of social media means that there is a global echo chamber for major, anxiety-inducing events. At the time of the last financial crisis, people generated approximately 300,000 tweets per day; 10 years on, there are more than this number in a single minute and more than half a billion a day. The echo chamber to amplify market anxiety has never been more powerful.

Second, aside from the obvious concerns about the greater potential for human spread of the virus, global supply chains have proliferated in their size and complexity, so companies globally have more potential to be impacted significantly by the temporary shutting down of companies and transport links. While companies with strong ties to China are feeling the hit, even companies that are ostensibly entirely detached from China are finding themselves impacted. As global supply chains have multiplied and become more inter-reliant, the potential for a rapid domino effect, triggered by another part of the chain, has never been higher.

Thirdly, asset valuations are at all-time highs. With markets “priced for perfection”, disruptive events which shake investor sentiment are capable of having outsized influence. Markets have also been priced for a global recovery in growth. While China was not expected to drive nor lift a global recovery as it did in 2015/16, a stabilisation in China’s economic activity is certainly at the heart of forecasts for European stabilisation and an Emerging Asia upturn.  China’s Q1 economic growth is already likely to take a hit as the coronavirus impacts a wide range of industries including, but not limited to, retail, transportation, and tourism before, if the SARs episode is anything to go by, picking up in the second half of the year. However, if the magnitude and duration of the coronavirus shock is greater and more persistent, then the basis for positive 2020 economic forecasts will be undone.

Alastair George, Edison Group, the research firm
At the present time, in our view the key for investors is to focus on the economic costs of controlling the outbreak, rather than fearing mass panic. A downgrade to Chinese GDP for Q1 2020 appears likely. Until cases have peaked, we believe travel and entertainment sectors are at risk of underperformance.

It was a surprise to us just how resilient markets had been in the face of adverse coronavirus headlines, given the precedent of SARS and its impact on markets in 2003. At this early stage, while basic parameters such as the R0 value (the number of new infections per infected human) and mortality rate are subject to a high degree of uncertainty, it is a fact that in China 40 million people already face significant travel restrictions.

Indications are that the outbreak is at the relatively early stages in China and it will take some time to bring it under control there. Nevertheless, while there have been some cases outside China there does not appear at this stage to be an epidemic of viral pneumonia in other nations – where public trust in data collection and case reporting is relatively higher.

The number of reported cases is likely to escalate sharply as the awareness of the disease grows but estimates of the mortality rate also decline as testing becomes more widespread for milder cases. In particular, China’s current reported case mortality rate of 2.9 per cent may significantly overstate the actual danger from infection if there is a much larger number of undiagnosed and minor cases.

On the critical assumption that the mortality rate is no worse than other viral respiratory diseases such as influenza, scenarios of mass panic are less likely to develop. Work to find a vaccine, building on the research for a SARS vaccine may bear fruit within a two-year period. In such a scenario, economies will be impacted by the measures taken to reduce transmission but provided these are not as draconian as those currently imposed in China the economic impact would be relatively modest.

In this regard, consensus GDP forecasts for China’s growth during 2020 are likely to come under pressure with spill-over effects across the region. Travel, discretionary and entertainment-related sectors are also likely to underperform until a peak is seen in the rate of infections and restrictions on travel and social contact lifted. We note that it may also take some months, rather than days or weeks, for the evidence for any reduction in the rate of infection to be visible in the data.

Gary Dugan, Johan Jooste and Bill O’Neill (Consultant), The Global CIO Office
The spectre of severe acute respiratory syndrome (SARS) has fallen across financial markets in the wake of the outbreak of a new strain of coronavirus. The virus, previously unknown to science, has wreaked havoc over the Chinese New Year. As a template for impact, investors are looking to the outbreak of SARS in 2002 when 774 people died out of 8,098 people infected. It is too early to judge just how widespread the virus has or could spread. However, the most recent efforts of the Chinese to contain the outbreak by effectively putting whole cities into isolation only serves to highlight the gravity of the situation. 

Equity markets have sold off and are still vulnerable, given the gains from a relatively strong start to the year. Much will depend on how much the virus has spread. Disruption to the Chinese economy is one thing, but if it starts to create problems in Europe and the United States, there could be a more substantial hit to the markets. Wuhan is one of China’s “motor cities’’. General Motors, Nissan Renault, Honda and Peugeot are among several companies that have large manufacturing plants. Luxury goods companies have also sold off as the Chinese New Year buying season has been damaged by the virus outbreak. 

Latest Comment and Analysis

Latest News