Rising concerns over an outbreak of a deadly coronavirus originating from Wuhan, China has stalled the risk-on market rally which began in October last year.
The number of confirmed cases globally has spiked more than two hundred-fold over the past two weeks to over 4,500 cases, including over 100 deaths as at 28 January 2020.
While it is still early stages with limited information available, drawing from our analysis of past coronavirus outbreaks, our base case is that the 2019-nCoV outbreak would likely last between two to four months and that the impact to China’s annual GDP growth would be limited to an estimated 0.5% or less.
Our base case: less severe economic impact than SARS
We expect a smaller impact versus the SARS outbreak - which caused a 1% hit to China’s GDP growth in 2003 – due to two reasons. Firstly, the Chinese authorities are acting much faster and more decisively in limiting transmission and raising public awareness versus the SARS episode in 2003.
During the SARs outbreak, it took the Chinese authorities almost three months to inform the World Health Organization (WHO) after the first case was confirmed on 16 Nov 2002. This time, China notified the WHO about the outbreak from Wuhan less than a month after the first case was confirmed on 8 Dec 2019, while at the same time taking decisive measures such as imposing travel restrictions in Wuhan and severely affected cities.
The 2019-nCoV virus is also showing a lower fatality rate of about 3% to 4% so far than the SARS virus which is about 10%. While we cannot rule out the risk that the coronavirus might turn more deadly or infectious, we see grounds for a less severe eventual impact versus SARS – which resulted in over 8,000 confirmed cases worldwide with 774 deaths.
Secondly, one reason why epidemics of this nature hurt the economy is that we see a sharp drop in overall consumer spending. As the masses shun public places, they spend less on travel and offline shopping, entertainment and restaurants. Online consumption, however, is likely to be unaffected and may even benefit from a further offline-to-online shift in behavior.
The SARS outbreak in 2003 took a heavy toll on overall consumer spending because online sectors such as e-commerce, online media and entertainment and food delivery services were far less developed at that time. In contrast, because online companies such as Tencent, Alibaba, Meituan, JD.com and NetEase now form an integral part of the Chinese population’s consumption habits, the impact on overall consumer spending is likely to be less severe versus the SARs episode.
Expect more pain before relief
Looking ahead, given that we are at an early stage of this outbreak, we expect the number of confirmed cases to escalate in the weeks to come, especially given that the outbreak began during the busiest travel period of the year in China before the Lunar New Year.
This signals more pain before relief for markets: During the SARS episode, the markets corrected as the outbreak escalated and only hit bottom when the rate of new cases peaked, before subsequently staging a sharp recovery. This suggests that this correction is ultimately one to buy, but it is now too early to buy broadly on dips.
So far, global equities have corrected about 2% since 17 Jan 2020. Most of the impact has been in Asia, with the MSCI Asia ex. Japan, the Hang Seng Index (HSI) and the MSCI China index down about 4%, 5% and 6%, respectively. Safe havens found firm bids as USD, JPY and US Treasury prices rallied on risk aversion while emerging market currencies – led by KRW, CNY and MXN – pared year-to-date gains.
Benchmarking the equities correction so far against the SARS episode, we note that the HSI and MSCI China index had corrected as much as 17% and 14% respectively during SARS, but if the 2019-nCoV outbreak is less severe, the depth of the correction might well be shallower.
Not surprisingly, the major sectors that have corrected significantly so far are those expected to suffer a negative impact from reduced consumer demand, such as airlines, travel agencies, restaurants, brick-and-mortar retailers, and Macau gaming.
While we can expect more downward pressure on these sectors as the epidemic escalates, a few companies with sound long-term fundamentals have already corrected significantly on epidemic fears. We believe investors with long-term horizons would do well to position themselves to buy on weakness ahead as bargain prices emerge.
Unlikely to cause lasting damage
Judging from the limited economic impact of previous Asian epidemics – SARS (2002-3), the Swine Flu (2009-10), MERS (2013-15) and the Avian Flu – we believe that the coronavirus outbreak alone is unlikely to derail an anticipated global economic recovery this year, given still-low interest rates, relief from a US-China trade truce and the likelihood of more stimulus from China to counteract the outbreak’s economic hit. Against this backdrop, the fundamental tailwinds of the economic expansion are still mostly intact.
While we expect more near-term pain, the outbreak is unlikely to cause lasting damage.Disclaimer applicable to recommendation
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