History shows China’s coronavirus impact on markets likely to be short-lived
Pedestrians cover their faces with sanitary masks after the first cases of coronavirus have been confirmed in Hong Kong, China on January 23, 2020.
Miguel Candela Poblacion | Anadolu Agency | Getty Images
As China’s Wuhan virus spreads, it is expected to continue slamming Chinese and other financial markets, but economists say it may ultimately have more impact on sentiment than be a lasting negative for the economy or markets.
Strategists also point to the reaction in Chinese and other Asian markets following the SARS virus, which declined as the outbreak spread but bounced back once it was contained.
For now, strategists expect a more direct impact in Asian markets with a less intense hit to U.S. stocks though investors have been moving into the safety of U.S. Treasury bonds. The hit to U.S. stocks would be far greater if the virus proves to be more deadly than it is now believed to be or infects large numbers of people both inside and outside of China.
On Thursday, Shanghai’s stock market tumbled nearly 2.8% and the yuan weakened, as China’s government took the extreme step of closing off all public transportation in Wuhan, a city of 11 million people where the virus was believed to have started. Two more cities were also put on lockdown.
Shanghai stocks are now closed for one week for the celebration of the Chinese lunar new year.
U.S. stocks were weaker Thursday with the Dow falling as much as 219 points, but it was just slightly lower in afternoon trading after the World Health Organization declared it was too early to call the coronavirus a global emergency.
“What happened here is everybody was shocked they would shut down a city of 11 million people. That made it sound like they were more worried about it. It’s still a factor,” said Art Cashin, director of floor operations at UBS. Cashin said if the outbreak is large in China and hits its economy, that weakness would spread globally. If the outbreak reaches the U.S., “it would be a larger hit.”
China’s response has been a stark contrast to its slower reaction during the spread of SARS, which is the outbreak most compared to the current virus. There were an estimated 8,000 people infected with SARS, or severe acute respiratory syndrome, and nearly 800 died, during late 2002 and 2003. The current virus, known as 2019-nCoV, has infected about 830 individuals and killed 25.
“The global response is much more proactive. China is being much more transparent. The virus appears less virulent,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “On the other hand, because the world is more mobile now, it has the possibility of spreading quickly. It’s impossible to predict where it goes. There are parts of the market that were questioning any big rebound on the trade deal even before this came out.”
At the start of the SARS epidemic, the U.S. stock market was just coming out of a bear market, but it hit another low in the first quarter, 2003 on concerns about the outbreak, he said. “It did result in a retest of the ’02 lows in March ’03, but then that was the end of that bear market,” said Boockvar.
He expects any hit to the U.S. market to be less severe than in China’s markets, unless the outbreak intensifies. “The [U.S.] stock market has taken on a life of its own in terms of momentum. I think what the Fed will announce in terms of its balance sheet next week will have more impact than the coronavirus,” he said.
Growth fears hit commodities
In commodities markets, there has been a dramatic reaction. Globally, oil and refined petroleum products, like jet fuel, diesel and gasoline, have been hit by fears the virus will slow global transportation and chill commerce and travel within China. Brent crude futures are down 4.5% for the week so far, about the same as copper futures, which have fallen on fears of Chinese slowdown could hurt global growth.
“When we compare it with SARS, it looks like the mortality rate is lower. A counter point is that China is far more connected with the rest of the world than it was in 2003. I think the number of people from China flying around the world has gone up by five to 10 times than it was in 2003,” said Mark Williams, chief Asia economist at Capital Economics.
Williams noted SARS impacted China’s economy by 5 percentage points and quickly bounced back. But he said it’s too soon to even try to gauge the impact of the current virus.
“As long as people think it is going to pass, then the impact on actual production will actually be quite small,” he said. “At some point, people will return to the shops. It isn’t like a long run impact on demand.”
The virus has roiled markets just as investors have been looking for benefits from the U.S.-China trade agreement, signed by the two countries earlier this month.
“Sentiment had been improving. There had been signs that China’s economy was turning around. Some of that was the trade deal, but not all of it,” said Williams. “[The virus] has certainly led sentiment to worsen quite sharply over the past few days. But markets can overshoot. As long as the outbreak is brought under control at some point, we’ll see the market pick up again.”
With the SARS outbreak, markets quickly rebounded. “Within a few weeks in 2003, the Chinese equity markets had made up a lot of their losses,” said Williams.
When the first cases of SARS were discovered in November, 2002, the Shanghai stock market had already been falling. It hit its low point near year end, before recovering to November’s level in January. Shanghai stocks took another dip later in the year, recovering those losses by January 2004.
Hong Kong’s stock market, which was traded more by the international community, fell about 16%, between November, 2002 and the next April. It recovered those losses by July, in the month after the World Health Organization gave Hong Kong the all clear.
Larry Hu, head of China economics at Macquarie Capital said the worst is still yet to come on the Wuhan virus because it is early in the outbreak.
“The lesson from SARS suggests that the turning point for sentiment will come only after the number of new infections starts falling,” said Hu, in a note. The “… bad news is that the largest people movement on the planet is underway right now as Lunar New Year is in three days. Moreover, compared with 17 years ago, both inbound and outbound travelers have increased multiple times in China.”
The Chinese economy is not expected to suffer a large or even lasting hit, but economists are reluctant to put an estimate on it until there is more information on the nature of the virus and how far it will spread. Hu said the impact from SARS was manageable and didn’t last long, trimming China’s quarterly GDP growth by 2 percentage points from 11.1% year over year to 9.1% during the third quarter.
“Unsurprisingly, things were especially bad for transportation, restaurants and retail sales, but property and exports were not much affected. Then the economy rebounded quickly after SARS faded away. GDP growth rebounded to 10.0% yoy in 3Q03,” he noted.
Morgan Stanley analysts said SARS had the biggest impact on China of any recent epidemic, like the MERS virus or Avian flu.
“The SARS experience shows the risk of a severe short-term disruption of economic activity and underperformance of local markets,” they wrote. They said the MSCI Hong Kong and Korea indexes underperformed by 10% and 11% respectively, as SARS escalated.
“Market troughs tend to occur at the initial signs of incidence stabilisation. Sector-wise, healthcare and defensive sectors have outperformed during the initial outbreak phase while macro-related sectors (Financials, Real Estate) and sectors with higher valuations, including IT, corrected the most,” they wrote. Williams said the reaction in energy prices was probably overdone, and the sectors most impacted should be retailers and other parts of the service sector, like restaurants.
The virus is impacting a lot of economic activity around the lunar new year, with many parties canceled and gatherings discouraged. In Huanggang, a city of 7.5 million people, officials shut its public transportation system and said they were closing movie theaters, internet coffee shops and cultural facilities.
After a case was discovered in Macao, officials were considering closing casinos, if the outbreak worsens. Las Vegas Sands, which has a Macao property, was lower in early trading, but edged higher Thursday afternoon after the WHO announcement.
Claudia Galimberti of S&P Global Platts said he expects that the outbreak has already impacted 200,000 barrels of refined products, mostly jet fuel. He said the shutdown of transportation in Hubei province has probably eliminated about 50,000 to 70,000 barrels a day of demand, with about 20,000 barrels of that jet fuel and the rest diesel and gasoline. Those barrels will be off the market until the province is no longer quarantined. Wuhan is the capital city of Hubei.
Source: S&P Global Platts Analytics
“If we have something like SARS right now, we should have 700,000 barrels a day [disrupted], primarily in jet fuels and primarily within China, Southeast Asia and South Asia. … For now, we say 700,000 is the worst case. We’re probably going to have something in the order of 150,000 barrels if we are able to contain the virus, and it has a lower mortality rate than SARS,” he said.
Globally, jet fuel demand is about 7.1 million barrels a day, he said.
“The impact is not tremendous,” he said. “Just because people are in fear of this virus, they are canceling their trips. … It’s tiny, but in the oil market everything is about market economics. Relatively small changes can cause a large drop in prices.”