Investment Strategies
Toll Rises From China's Coronavirus - Wealth Managers' Reactions

The virus, originating in China's Wuhan, has prompted a massive clampdown on movement in the country and raises the alarm about how supply chains and travel will be disrupted in coming weeks. Stock markets have tumbled, encouraging a flow to safe-haven asset classes. Here are some industry reactions.
Global equity markets and others were hit hard yesterday as news
reports showed that the deadly coronavirus in China had claimed
more lives, prompting the country to impose draconian travel bans
and other restrictions. The outbreak reminded investors of the
SARs virus outbreak of almost two decades ago, and how it heavily
disrupted transport and supply chains. Today, European equities
recovered slightly, but Asia was still under pressure. Spot gold
prices rose to $1,585 per ounce on January 27 (source:
BullionVault). Hong Kong has announced plans to slash
cross-border travel between the city and mainland
China. More than 100 people have now died in China, with
confirmed infections surging to more than 4,500 (source:
BBC, other outlets).
Coming on top of US-China protectionism and rows about
intellectual property rights theft and other abuses, the Chinese
virus will rattle investors already concerned that equity market
valuations were becoming overcooked, particularly in the US.
People may have wondered whether there were any “black swans”
about to fly over the horizon this year, and it appears an early
flock has arrived from Asia.
All that said, information about the scale of what is going on is
not easy to obtain, and not simply because Communist-controlled
China heavily controls the media and non-domestic access. The
flipside of an authoritarian state is that it can act decisively
in ways that more liberal nations cannot. Making an investment
judgement call is difficult.
This publication will update on wealth managers’ reactions as
they come in, and those who want to contact us should email
tom.burroughes@wealthbriefing.com
and jackie.bennion@clearviewpublishing.com
Here is a collection of comments from around the world. The regional diversity of comments is deliberate, precisely because this is a global issue, with international implications. (Of course, some of the commentaries may be out of date even by the time this article goes live, given how fast events are moving, so the usual caveats apply.)
Seema Shah, chief strategist at Principal
Global Investors
Fears around the spread of the coronavirus are being reflected –
violently – in global markets. The dynamics of how concerns about
the virus translate into market movements are different to that
of SARS back in 2003. Risk velocity – the pace at which major
risks and “black swan” events can affect asset prices – is
elevated in today’s markets compared to 10 years ago for three
key reasons.
Firstly, the rise of social media means that there is a global
echo chamber for major, anxiety-inducing events. At the time of
the last financial crisis, people generated approximately 300,000
tweets per day; 10 years on, there are more than this number in a
single minute and more than half a billion a day. The echo
chamber to amplify market anxiety has never been more
powerful.
Second, aside from the obvious concerns about the greater
potential for human spread of the virus, global supply chains
have proliferated in their size and complexity, so companies
globally have more potential to be impacted significantly by the
temporary shutting down of companies and transport links. While
companies with strong ties to China are feeling the hit, even
companies that are ostensibly entirely detached from China are
finding themselves impacted. As global supply chains have
multiplied and become more inter-reliant, the potential for a
rapid domino effect, triggered by another part of the chain, has
never been higher.
Thirdly, asset valuations are at all-time highs. With markets
“priced for perfection”, disruptive events which shake investor
sentiment are capable of having outsized influence. Markets have
also been priced for a global recovery in growth. While China was
not expected to drive nor lift a global recovery as it did in
2015/16, a stabilization in China’s economic activity is
certainly at the heart of forecasts for European stabilization
and an Emerging Asia upturn. China’s Q1 economic growth is
already likely to take hit as the coronavirus impacts a wide
range of industries including, but not limited to, retail,
transportation, and tourism before, if the SARs episode is
anything to go by, picking up in the second half of the year.
However, if the magnitude and duration of the coronavirus shock
is greater and more persistent, then the basis for positive 2020
economic forecasts will be undone.
Alastair George, Edison Group, the
research firm
At the present time, in our view the key for investors is to
focus on the economic costs of controlling the outbreak, rather
than fearing mass panic. A downgrade to Chinese GDP for Q1 2020
appears likely. Until cases have peaked, we believe that travel
and entertainment sectors are at risk of underperformance.
It was a surprise to us just how resilient markets had been in
the face of adverse coronavirus headlines, given the precedent of
SARS and its impact on markets in 2003. At this early stage,
while basic parameters such as the R0 value (the number of new
infections per infected human) and mortality rate are subject to
a high degree of uncertainty, it is a fact that in China 40
million people already face significant travel restrictions.
Indications are that the outbreak is at the relatively early
stages in China and it will take some time to bring it under
control there. Nevertheless, while there have been some cases
outside China there does not appear at this stage to be an
epidemic of viral pneumonia in other nations – where public trust
in data collection and case reporting is relatively higher.
The number of reported cases is likely to escalate sharply as the
awareness of the disease grows but estimates of the mortality
rate also decline as testing becomes more widespread for milder
cases. In particular, China’s current reported case mortality
rate of 2.9 per cent may significantly overstate the actual
danger from infection if there is a much larger number of
undiagnosed and minor cases.
On the critical assumption that the mortality rate is no worse
than other viral respiratory diseases such as influenza,
scenarios of mass panic are less likely to develop. Work to find
a vaccine, building on the research for a SARS vaccine may bear
fruit within a two-year period. In such a scenario, economies
will be impacted by the measures taken to reduce transmission but
provided these are not as draconian as those currently imposed in
China the economic impact would be relatively modest.
In this regard, consensus GDP forecasts for China’s growth during
2020 are likely to come under pressure with spill-over effects
across the region. Travel, discretionary and
entertainment-related sectors are also likely to underperform
until a peak is seen in the rate of infections and restrictions
on travel and social contact lifted. We note that it may also
take some months, rather than days or weeks, for the evidence for
any reduction in the rate of infection to be visible in the
data.
Gary Dugan, Johan Jooste and Bill O’Neill (Consultant),
The Global CIO Office
The spectre of severe acute respiratory syndrome (Sars) has
fallen across financial markets in the wake of the outbreak of a
new strain of coronavirus. The virus previously unknown to
science is wreaking havoc over the Chinese New Year. As a
template for impact, investors are looking to the outbreak of
Sars in 2002 when 774 people died out of 8,098 people infected.
It is too early to judge just how widespread the virus has or
could spread. However, the most recent efforts of the Chinese to
contain the outbreak by effectively putting whole cities into
isolation only serves to highlight the gravity of the
situation.
Equity markets have sold off and are still vulnerable, given the
gains from a relatively strong start to the year. Much will
depend on how much the virus has spread. Disruption to the
Chinese economy is one thing, but if it starts to create problems
in Europe and the United States, there could be a more
substantial hit to the markets. Wuhan is one of China’s “motor
cities’’. General Motors, Nissan Renault, Honda and Peugeot are
among several companies that have large manufacturing plants.
Luxury goods companies have also sold off as the Chinese New Year
buying seasons has been damaged by the virus outbreak.
Bank
of Singapore
Our base case: Wuhan virus outbreak to have less severe impact
than SARS, 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.
First, the Wuhan virus is so far showing a lower mortality rate
(~3 per cent) versus SARS (~10 per cent) and MERS (>30 per
cent). Second, although the Wuhan virus is transmittable from
human-to-human like SARS is, the Chinese authorities are acting
much faster and more decisively in limiting transmission and
raising public awareness versus the SARS episode.
In the SARS episode, 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 Wuhan virus outbreak less than a month
after the first case of infection was confirmed on December 8,
2019.
Chris Towner, director at JCRA, which is part of Chatham
Financial, is an independent financial risk advisor specialising
in hedging and debt advice.
With the death toll rising above 100, financial markets are still
trying to gauge the potential reach of this deadly virus. By
comparison, the SARS virus impacted 8098 people with 774
fatalities. The question now is how quickly can this virus be
contained and, in the meantime, how many countries and economies
will be impacted? In times of risk aversion, money normally
floods into the Japanese yen and the Swiss franc. Due to the
proximity of Japan to China the risk of the virus penetrating
Japan is high, with one confirmed case so far. Therefore, the
Swiss franc is currently seen as the ultimate safe haven and has
strengthened by over 3 per cent against the euro from its
pre-Christmas level of SFr1.10 to the euro in the 1.06’s, the
strongest level since April 2017. Markets will now be focusing on
the pace of the spread of the virus and whether there are signs
of acceleration or deceleration.
Kingswood -
a London-listed wealth management group
Global equities had started to looked vulnerable to a correction
following their gain of close to 14 per cent since early October,
and the coronavirus has provided the catalyst for just such a
setback. The US market was down on Friday and the UK and European
equity markets have fallen by 2 per cent or so this morning. The
coronavirus has provoked comparisons with the SARS virus back in
2003 which ended up with close to 800 people losing their lives.
However, while there are clear parallels, there are also
significant differences.
Mortality rates from the new virus are lower than with SARS but
the coronavirus (unlike with SARS) is infectious before symptoms
show up, substantially increasing the danger of it spreading
rapidly. Even so, there is still a great deal of uncertainty over
how serious the crisis will turn out to be and the World Health
Organization (WHO) has so far held off from calling a global
health emergency.
In assessing the potential economic and market impact – rather
than the very evident human cost - the SARS outbreak is as good a
starting point as any. That outbreak hit Chinese growth and the
Chinese equity market significantly but the impact was
short-lived with both rebounding within a matter of months. As
for global equities, there was minimal impact at all. This time
round, the Chinese economy is much larger and much more connected
with the global economy. The Chinese authorities have also
imposed much more draconian measures to try and halt the virus.
The short-term impact on the Chinese economy is therefore likely
to be considerable – not that there will be any hard data
released to measure this for a good couple of months.
As far as the global economy is concerned, we don’t at this stage
believe this hit is large enough to merit altering our base case.
We continue to expect global growth to recover a little over the
coming year on the back of the relaxation of monetary policy and
easing in trade tensions. As for global equities, the risk is
clearly that the news gets worse before it gets better and the
market correction could well have further to run as a result.
Indeed, corrections of 5-10 per cent are surprisingly common. In
the past, however, even when global health scares have impacted
markets, the effect has been short-lived. At the peak of
Ebola fears in 2014, global equities fell back by 9 per cent over
the course of a month but had recouped these losses within
weeks.
If we do see a 5-10 per cent correction, we are currently minded
to use the opportunity to add to our equity holdings and move
overweight from neutral. That said, we would only implement such
a move following a careful reassessment of the situation.