The exponential rate at which the Wuhan coronavirus is spreading has raised concerns over the economic impact of the viral outbreak and put downward pressure on the equity markets, while pushing safe havens higher. Despite that preventative measures to control the spread of virus are being put in place, past epidemics suggest that the negative sentiment is only expected to be lifted once the outbreak is perceived to be under control.
Last week, the World Health Organisation declared an international emergency over the coronavirus epidemic due to concerns of the virus spreading to countries with weaker health care systems. While it is hard to quantify the economic repercussions of the outbreak, a look at past viral outbreaks and their impact on financial markets enables us to draw a comparison to the current developments of the coronavirus.
The past Severe Acute Respiratory Syndrome, known as the SARS outbreak in 2003 is a clear example, having also originated in China and started around the same time of the year. During the SARS period, the outbreak levelled off after three months it became public but was enough to lead to short and sharp shocks to economic growth, with economic activity usually recovering in the subsequent quarters. Needless to say, the current outbreak has already exceeded the total amount of confirmed numbers reported during SARS.
Similar to the SARS outbreak, the hardest hit sectors over the past days have been those sectors which are most exposed to consumption from China, such as airlines, luxury goods companies, and companies that fall under the hospitality sector. The fact that the outbreak coincided with the Chinese New Year certainly did not help. Last year, the lunar New Year holiday week brought in over one trillion yuan in retail sales, equivalent to $144 billion.
In contrast to the SARS, government response measures have been issued at a quicker pace with higher transparency and exchange of information. City lockdowns and international travel restrictions were put in place as preventive measures to stop the contagion.
Companies also reacted: travel cruises and airlines suspending scheduled trips to China, Disney announcing its closure of its resorts and parks in Shanghai and Hong Kong, while retail shops, such as Starbucks and McDonalds closing all shops in Wuhan. In fact, official statistics show that total passenger volume dropped by 28.8 per cent on the first day of the Lunar New Year compared to the previous year.
Given that companies’ exposure to the Chinese consumer has grown significantly since the SARS, the negative impact on earnings outlook now is also higher. In fact, the higher dependency on the Chinese economy is reflected in China's contribution to global GDP, which stands at 16 per cent as at the end of 2018, compared to four per cent during the SARS outbreak.
Moreover, the economic backdrop during the SARS outbreak was much stronger compared to today’s economic environment. In 2003, China was benefitting from its entrance to the WTO and a period of global economic growth. This contrasts with today's economic scenario, with economies already reporting weaker manufacturing numbers following months of the US China trade war saga.
While the extent of the economic repercussions depends on the severity and duration of the outbreak, we expect a continued near term drag on financial markets. Past epidemics have taught us the impact tends to be short lived and market relief is expected once the growth in reported cases starts to decline.
Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.