Business

How will the Coronavirus outbreak impact stock markets?

A prolonged impact on business due to the Coronavirus outbreak will serve the healthcare market well (demand for face masks is already off the scale)
A prolonged impact on business due to the Coronavirus outbreak will serve the healthcare market well (demand for face masks is already off the scale) A prolonged impact on business due to the Coronavirus outbreak will serve the healthcare market well (demand for face masks is already off the scale)

RIGHT now the scale of the Coronavirus outbreak makes it impossible to gauge how badly it will impact the global stock markets, just as it was in 2002/3 for the Sars virus, 2003 and 2009 for the Iraq War the impact of the 2004 tsunami in Asia, solely because it's difficult to be mindful of human loss and be concerned with capital gains.

At the time of writing there were nearly 8,000 cases of the virus (already more than Sars), with over 100 outside China, in 14 different countries.

Respectable media outlets have produced a mushrooming gif of the growth globally, which, at first, looks very alarming. The University of Lancaster estimated that only 5 per cent of infections in Wuhan had been found, and the number could leap close to 200,000 by early February.

There are conflicting studies regarding the outbreak with some research showing the virus has been around for longer than stated, and as such, unconstrained. The impact of that could be significant. For example, the very first patient (patient zero), along with 13 others, had no link to the seafood market in Wuhan where the original outbreak was deemed to be from.

Consider that unlike the flu virus which has a reproduction rate of 1:1.4, this virus has a reproduction rate of two to four people for each case. If it has been around before being spotted, this could be very serious indeed. The fatality rate however, is about a third of Sars.

Back then in 2003, the Hang Seng index still fell 4 per cent around five months after the Sars outbreak, and given that stock markets don’t really look more than six months ahead, this may be why some Asian markets have responded by repricing so quickly.

What (correctly) happens in society is that humans avoid contact and travel, and non-essential items become what they are – non essential. Why gamble, buy nice pretty cars, spend money on duty free, travel? Airline traffic in China halved with Sars and Singapore/Hong Kong travellers dropped by 66 per cent.

We know that markets responded very quickly after it cleared (two to three months) and the ‘postpone effect’ meant travellers did what they wanted to do very soon afterwards, so equalling back to normal travelling numbers, and markets responding like a stretched rubber band.

What we hope is that Mr Ghebreyesus from the World Health Organisation is telling it straight, saying that China had ‘scale, speed and efficiency’ to deal with the virus, and that it would be contained.

That hasn’t protected markets. In the early aftermath, the Hang Sang had dropped 5.5 per cent in the week and Taiwan’s stock benchmark at 5.8 per cent loss. Apple supplier Foxco dropped 10 per cent as factories closed across China for another week. European stocks remained reasonably benign for now at a 1 per cent fall.

The U.S. meanwhile raised its level of alert to avoid non-essential travel.

Let’s remember China is powering global growth. Google it. Look at how they despairingly describe China’s growth at ‘just 6.1 per cent’ for the year. Any movement in growth away from levels the UK/U.S. would faint at the site of, signals serious wobbles. It is the powerhouse.

Cathay Pacific halved its flights into China and British airways has blocked out sales until March. Meanwhile Hyundai and Toyota have kept their plants shut.

Chinese customers represent 40 per cent of global spending on luxury items. No surprise their prices have nosedived, and with a sector trading at 25 times its earnings, it’s at ‘dotcom bubble level’ and hard to see why it can have any 'bouncebackability' afterwards.

Remember, some institutions use this as a chance to dump their bad news, and hedge fund managers use it as a dream ticket to create volatility and sell shares short.

In the meantime, a prolonged impact on markets will serve the healthcare market very well. Hand-sanitisers are already empty, and, as useless as face masks are (the filters aren’t tight enough), demand is off the scale.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial or investment query call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.