The human suffering from COVID-19 has been in the news for over a month but until the last week the financial markets had not been materially affected.
However, over the past two days markets have fallen substantially, with news of the spread of infections to Europe, especially Italy.
It is not possible to know how serious and long lasting this will be. Often in the past, fears in the markets (including medical) have caused significant and rapid falls in prices but have been short term in duration.
Certainly, the news is focusing, as it does, on the more hysterical elements of the situation but this does not in itself negate that it could become extremely serious.
George has put together a review from multiple sources which gives a more rounded and comprehensive overview of what is currently known and projected.
We are monitoring everything daily and at present, we are clear that nothing is clear.
What we know
Earlier this month, several news outlets published a decade-old map which was part of a research project displaying air travel of Wuhan residents in previous years. The chart was covered in red lines to show the potential global spread of coronavirus. Although it has subsequently been acknowledged as highly misleading and inaccurate, you can still find the reports on-line.
This is far from the only inaccurate information circulating. There was another article recently stating that up to 400,000 people will die from coronavirus based on totally unproven statistical data; I could go on.
The negative change for markets came in recent days when Apple and others indicated that supply chains were being hurt. This of course could then lead to a global slowdown, which lessens profits and so share prices fall.
There are also growing concerns in China, with only about three out of ten small and medium-sized enterprises (SMEs) returning to work; transport problems are preventing workers travelling and disrupting shipments of raw materials.
The challenge for investors is identifying between fact and fiction, there are genuine concerns on the supply chains and economic output, as well the potential for coronavirus to become a pandemic.
Coronavirus is in simple terms a strong flu virus
In 2016, the World Health Organisation (WHO) published the top 10 causes of death; a cheerful read but it puts things into perspective. Heart disease and stroke are the two biggest, killing over 15 million people annually. Road injuries caused 1.4 million deaths. In terms of flu, it is estimated that 45 million are infected each year and WHO estimates between 250,000 and 500,000 people die from it. In the UK this number is about 600, although in 2008/2009 this was over 13,000.
Currently, 97% of global cases of coronavirus are still within mainland China. The virus was first reported around December 2019. Most cases remain in the Hubei province, its population is roughly equal to New York and California states combined. Across China, it does seem to be more under control with 335 cases in Shanghai (population 24 million) and 339 in Beijing (population 22 million).
It does appear to be slowing, on 3 February there were 890 new confirmed cases in mainland China excluding Hubei; on 23 February only 11. Hubei reported 398 cases on 23 February which is still high but declining. On 24 February the director of WHO said, “the COVID-19 epidemic peaked and plateaued between 23 January and 2 February and has been declining steadily since then.”
95% of all global fatalities have taken place in Hubei province. There have been 26 deaths outside of mainland China. In total there have been 2,618 deaths and putting this into context, in the US alone there have been 16,000 deaths from flu this year. Data seems to show that 80% of cases were considered mild and it seems Hubei has suffered more, because the health system has been unable to cope with the number of patients, who may have survived with better care.
The COVID-19 case-fatality rate is 3.3%, SARS was 10%, Middle East respiratory syndrome 35% and Ebola 50%.
Currently, the concern is the spread across Europe and other countries around the world and whether this turns to a pandemic. The most recent pandemic was in 2009 with swine flu. Globally, estimates were between 151,700 and 575,400 deaths, but this doesn’t necessarily indicate what might happen with coronavirus.
As an aside, there is an interesting article in the Conversation which talks about parallels with the Yellow Peril in the 1880s – https://theconversation.com/world-economy-flashes-red-over-coronavirus-with-strange-echoes-of-1880s-yellow-peril-hysteria-132414
What are the economic risks?
In China, people are slowly starting to resume normal lives, and as more people start taking public transport, and return to offices, factories and restaurants there is a risk that there could be a spike in cases. There is though an increase in countries such as South Korea, Iran and across Europe.
Data from Matthews Asia shows as a result of SARS in 2003, nominal retail sales in China slowed from 9.2% in the first quarter of 2003 to 4.3% in May. For the whole year, retail sales were at 9.1% (up from 8.8% in 2002). For the full year, GDP rose by 10% compared to 9.1% in 2002. So, although data slowed during the crisis over the year, the data was better than the previous year.
It is also worth remembering that before this, the global economy including China was doing well. If we start to see a return to normality and for cases to slow, Matthews Asia believe things could be back to normal in the next month or so. In the short term as we saw with SARS, the economic data will be poor, but will be no reason why if stabilised, the end of year figures look bad.
The concern about supply chain disruption is real and will be a drag. There are many factors in play and if it spreads aggressively across the world, and if it forces a slowdown in the US and Europe economically. As indicated, everything was okay before this happened, but economies are not super strong, and worse case scenario is a global recession.
We have seen this before
As indicated, the concern is if this escalates to such a point that we are plunged into a global recession. Clearly markets are now fearful that this might be the case. We can look at all the scientific data and conclude that the probability seems slim but, we don’t know. What we do know is that over the coming days and weeks the markets will be nervous. If things escalate quickly and a pandemic is called, then there is the potential for markets to fall further, but markets have already have priced in some of the worst case scenario.
If, however, infections slow down and the announcement from WHO is correct then, we will start to see markets calm. If China steps in to support small businesses and supply starts to move again, then although in the short term the economic data will be poor this will mostly correct over time.
We will be monitoring this carefully over the coming weeks.
Sources: BBC, World Health Organisation, University of Oxford and Matthews Asia
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.