Investment Strategies

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

Tom Burroughes Group Editor 28 January 2020

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 (Of course, some of the commentaries may be out of date even by the time this article goes live, given how fast events are moving, so the usual caveats apply.)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.

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