February 11, 2020. By Mark Barry
Written with information as available on January 31, 2020:
Concern over the spread of the Wuhan coronavirus has continued to weigh on markets, with the S&P 500 Index and MSCI China Index down about -1.80% and -2.00% respectively on the day. This risk off-sentiment has also been reflected in the bond market, with 10-Year Treasury yields approaching 1.50% after trading above 1.80% for the first few weeks of the year. While at this point the majority of coronavirus cases have largely been contained to China, the country is a key cog in the global economy and markets correctly assume that a prolonged disruption in China will dent global economic growth. Additionally, there is the potential for the outbreak to spread materially across other countries which would see economic activity and markets come under further pressure. However, as it currently stands we do not believe that the coronavirus will have a lasting negative impact on markets and have expanded on our thoughts below.
Coronavirus Outbreak
First reported in Wuhan, China on December 31, 2019, the novel coronavirus or 2019-nCoV (referred to as coronavirus from here on out) spread quickly within the country, with the number of people in China infected reaching 9,811 as of this writing with 213 reported deaths. The timing of the outbreak was particularly inopportune, as it coincided with Lunar New Year, China’s most important holiday, where citizens travel to gather with family in what has been called the world’s largest human migration. Another ~150 or so cases of the coronavirus have been reported in other countries including the United States, France, and Germany, but the spread of the virus outside of China appears to be relatively contained so far with no recorded deaths. Yesterday, the World Health Organization did take the step to declare the outbreak a Public Health Emergency of International Concern (PHEIC).
Despite an apparent lackluster initial response by local authorities in Wuhan, China has taken strong action to contain the virus and has acted in a much more transparent manner than it did during the 2002/2003 SARS virus outbreak. Several major cities have been quarantined in an effort to reduce transmission of the disease, and the government has implemented additional preventative measures such as travel restrictions, banning large gatherings, extending the Lunar New Year Holiday, and encouraging employees to work from home. Other countries have taken action to prevent the spread of the coronavirus across borders, cautioning against and/or banning travel to China and quarantining travelers who recently returned from infected areas. In the United States the CDC is closely monitoring the situation but has highlighted that the risk to Americans is believed to be low at this time.
It is also worthwhile to mention that the mortality rate for those infected by the coronavirus is about 3% at present, significantly lower than the 10% mortality rate of the SARs virus, and the median age among the 213 deaths was 75 years old, many of which had preexisting conditions such as diabetes. Meanwhile, in past years the CDC has put flu deaths in the United States alone at 75,000+ in severe seasons. The coronavirus is indeed a serious health scare, but some perspective is useful.
Market Implications
While the coronavirus outbreak has negatively impacted markets in recent weeks, we believe that this correction will prove temporary. Although specific characteristics of the virus make containment more difficult, such as an extended incubation period (no symptoms) where transmission can occur, we think that Chinese and world authorities will be able to put a halt to the outbreak in the next few months. It appears that the spread of the virus has yet to peak so negative news flow could continue to pressure markets, and we will certainly be watching to see if the situation deteriorates further, but past pandemics have not led to sustained selling as shown in the table below:
As to the effect on China’s GDP, yes there will be a significant short-term economic impact. But if we are correct in believing that the situation will be reasonably contained in the coming months, it should only be a temporary one and will fade quickly. We would encourage investors to maintain the course and not be reactionary in response to this virus outbreak. While the situation certainly bears watching (and we will be following it closely), it is unlikely that the coronavirus outbreak is the cause of a major market correction as it stands.