Going Viral

James Penn
February 10, 2020

Earlier this year it was widely predicted on the internet that the assassination of General Solleimani would lead to World War III.

Those fears proved exaggerated and the flare-up in tensions in the Middle East soon fell off the agenda. Markets moved on to make a new high soon afterwards on January 17th.

However, the Coronavirus, which was declared a national emergency in China three days later on January 20th, looks to have more mileage in terms of creating economic damage and stock market panic.

Internet searches on the Coronavirus may have fallen in the past week, but the matter is still very much on the agenda as far as equity markets are concerned.

As this column has espoused previously, stock markets dislike ‘uncertainty’, and there is uncertainty in spades in relation to this issue.

We don’t know how the Coronavirus is transferred; we don’t know what will cure it; we don’t know how long it will be around; and we don’t know how many people will be infected by it.

We don’t know if anti-viral HIV treatments can combat it, or if Chinese scientists will come up with a fix in the next few weeks. Will a vaccine be found in the next six months? Will the factories of China be reopened on February 14th after the extended holiday? No-one knows…

The virus is still an ‘epidemic’, given the containment policies have been partly successful. But it’s still very much possible that it becomes a pandemic – an illness that affects multiple countries rather than one.

The closest parallel is with the SARS epidemic of late 2002, which affected China badly. I seem to recall shares in Intercontinental Group, which has high hotel exposure in Asia, dropping sharply over this period.

The death rate for the Coronavirus may be only 2% of cases as opposed to 10% for SARS, but there are already far more cases of Coronavirus relative to SARS.

More importantly, China comprised 3% of global GDP in 2003, but is now nearly 20% of global GDP in Purchasing Power Parity terms. It is also more integrated into global supply chains than it was then.

The Coronavirus has impacted economies and markets in three ways: the travel ban has been bad for airline and luxury companies, which comes on the back of last year’s difficulties in Hong Kong.

There has been the impact on supply chains, with Korea’s Hyundai shutting all seven of its factories because of a shortage of parts made in China. Airbus has closed a factory there that makes 10% of its A320neo airplanes, while Tesla has shut its factory in Shanghai. Apple is expected to ship 5-10% less iPhones this quarter, given their assembly by China’s Foxconn. Ericsson has also suspended production in China and the Wuhan area.

Then there has been the impact on the big commodity producers. All the base metal prices have fallen sharply recently, given China consumes roughly 40% of many of them.

Stocks rallied Monday through Thursday last week, after a big sell-off the previous week, although the week ended on a sour note on Friday.

Some investors are clearly seeing the pullback as a buying opportunity. We will know in six weeks’ time whether that has been wise.

For the situation to improve, the geometric rate of infection that we have seen thus far needs to slow and be replaced with, at the very least in the near term, an arithmetic rate.

A 30% arithmetic rate of transmission is a lot better than a 30% geometric rate, as mathematicians will know.

Then we could perhaps look forward to a plateauing in cases, which would allow the authorities, and the health providers, to get on top of the problem.

Overall, it reinforces one perception I’ve derived over the past ten years: that whenever things seem like they’re starting to get better… something comes along and puts a spanner in the works.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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