It therefore matters more than ever, when assessing the impact on investment markets, that we cut through the media frenzy and establish what the facts are. Should we panic or not? What is the actual situation on the ground in Wuhan and just how serious is this virus?
The rational reaction is to refer back to precedent such as SARS or Swine Flu and conclude that this will pass, the headlines will move on and the markets will recover. There may be some economic impact, principally in China, but if this outbreak persists and leads to lengthy shutdowns of manufacturing facilities, exports to the west will be affected. You can see the knock-on effect globally. The markets have priced some of this in with the obvious suspects being airline stocks, leisure, such as cruises and hotels, Prudential which has a large Asian business, Burberry whose brand is very popular in Asia and mining stocks, due to the potential fall in demand from China if the economic impact is severe. SARS reportedly impacted Chinese GDP by 2% across all industries. This is all very rational, probably justified, and in this environment of very imperfect knowledge, reassuring that the markets are not panicking.
One significant development was that the World Health Organisation (WHO) has not yet declared an international public health emergency as it did with Swine Flu and Ebola. This has been hugely important and has settled investment markets. However, the conspiracy theorists are saying that the Chinese now have significant influence at the WHO and may have wanted this outcome in order to downplay the whole issue. There is also another story doing the rounds that significant numbers of medical staff are being drafted in from Beijing due to much higher infection rates within hospital staff than is being officially reported. That goes for all information coming out of China. What are the true rates of infection and mortality? The one thing we can be certain about is that in a few days’ time we will know whether the rate of infection/mortality increase is slowing or whether it is still increasing exponentially. The number of deaths has been doubling daily but has now slowed somewhat. The key differentiating feature here is that the virus can be spread before a sufferer shows any symptoms, unlike SARS, where quarantining those with symptoms stopped the virus from spreading.
In situations like this, we would always prescribe caution when events are still unfolding until the facts are established. However, when there is an event that has the potential to move markets, we remain vigilant and will continue to watch events closely. We do have exposure to emerging markets, which includes China, albeit making up only a small percentage of our overall portfolios.
Looking deeper into the historical precedent data it is useful to examine what economic impact SARS caused, the countries affected and the degree. In 2004 alone, according to figures from the Asian Development Bank, SARS impacted Hong Kong GDP by 4%, the next most affected was Singapore and Taiwan, both affected by 2%, whilst China and South Korea were impacted by 0.5%. Of course, 0.5% of Chinese GDP is a much bigger absolute number than 4% of Hong Kong GDP. Last year, Chinese GDP was almost 38 times the size of that for Hong Kong according to figures from the World Bank which means that if the effect of SARS was replicated, the absolute effect in US Dollars would be five times greater in China. This is why mining stocks are also feeling the pain because that has global aggregate demand implications.
Moving on to air travel with SARS, during the peak period of contagion control, international passenger arrivals fell by 65% in both Hong Kong and Singapore and by between 30-50% in the surrounding Asean countries, figures quoted by the Asian Development Bank. We hear that the number of passengers travelling into and out of the affected region have fallen by around 50%, so a similar pattern of behaviour, which eventually contained the SARS virus. A significant point to note is the sharp drop in passenger numbers to Hong Kong - this could be significant if the new virus does continue to spread. Hong Kong has already suffered massively reduced tourist numbers due to the protests that took place there throughout 2019 and recent economic data including Purchasing Managers’ Index (PMI) numbers from Hong Kong have been weak, indeed it entered recession in the third quarter of 2019. The Hong Kong economy, already fragile, would be especially vulnerable to any fall in visitor numbers due to the outbreak of this virus. However, China is the source this time and so the impact will be felt more acutely in and around Wuhan.
To conclude, we remain vigilant but the importance of these events on markets remains unclear. Like many of these styles of events, although markets in the short term can react and indeed in many cases overreact, over the long term the effect they have has been insignificant. Markets are now reacting with the FTSE down with other markets following further falls in China and Hong Kong, but what the long-term impact could be remains unclear. However, this will probably get worse before it gets better. Be prepared for more hysterical headlines. These could mark the bottom for markets.
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