This material was updated on February 4, 2020, from its original publication.
We are closely monitoring the impact on emerging market economies and equity markets from the outbreak of the coronavirus in China and other parts of the world. The situation is at an early stage and is evolving quickly. Both market and macro implications depend on the severity and duration of this epidemic episode.
What We Know So Far
- Since the first cases of the 2019 Novel Coronavirus (2019-nCoV) were notified to the World Health Organization (WHO) on December 31, 2019, over 20,000 confirmed cases have been reported in China, in addition to thousands of suspected cases and hundreds of deaths.1 Based on these reported figures, this coronavirus appears to be less fatal than SARS (severe acute respiratory syndrome) with a less than 3% fatality rate so far. It also seems to be deadly for a more fragile segment of the population (typically older people with pre-existing health conditions). Detection and reporting are still in the early stages, and with an incubation period of up to 14 days and the Chinese New Year holiday factor, we expect to see further increases in the number of confirmed cases in the short term. While cases have been reported in several countries abroad, as of now, China still accounts for the overwhelming majority of confirmed cases.
- Comparatively, in 2003, the SARS virus affected over 8,000 individuals, causing over 770 deaths, with a fatality rate exceeding 9% over eight months, according to the WHO.2 The virus infected people across 26 countries, including the United States, Canada and a few European countries, although most cases were declared in Asia.
- While apparently less fatal, the 2019-nCoV virus seems to be significantly more contagious than SARS. According to WHO figures, in China alone, the number of confirmed cases has been roughly doubling every 2-3 days since January 20. This suggests we are still some ways away from seeing a peak, and the total number of infections has already exceeded the total number of people infected by SARS in 2003. So, the apparently much lower mortality rate versus SARS may still result in a death toll from the 2019-nCoV outbreak exceeding that of SARS.
- Wuhan, the epicenter for the 2019-nCOV outbreak, has a population of over 11 million people, and around 60 international flights to over a dozen countries normally depart the city’s airport each week. While travel restrictions have been put in place, risks of further international spread persist, and the reach and severity of the situation may not be known for another few weeks. China is much more integrated into the global economy than it was in 2003, and the number of Chinese nationals traveling all over the world has doubled over the same period, which raises the risks to the global economy and health. Concerns about the spread of the virus have led a few countries to implement travel restrictions for those coming from Wuhan and the Hubei province.
- The WHO declared the outbreak a global health emergency.
- On the positive side, policy response has been significantly quicker and more proactive than during the SARS episode in 2003. Chinese health authorities have shared information and raised awareness of the virus in a more timely manner. In addition, the government has taken stringent measures to curb the outbreak, including travel restrictions around Wuhan and multiple other cities, as well as extending the Chinese New Year holiday by three days. In addition, an emergency hospital to treat patients in Wuhan was constructed in just a few days.
Our View of the Economic Impact of the Coronavirus
Short term: Negative.
We think the current events will have a negative impact on sentiment as well as the economy in the short term. In China and Asia, near-term business activity and consumption will likely be significantly impacted as people curtail their movements as a preventive measure. This could result in a materially negative growth print. Our teams on the ground report that people in China have been canceling travel plans, social interactions and outings, leaving restaurants, cinema theaters and hotels empty. There is much-reduced traffic in the transport hubs that are still in operation.
Consumption is a meaningfully more important contributor to the economy than it was in 2003 at the time of the SARS episode, and now accounts for over 70% of China’s gross domestic product (GDP) growth (versus less than 40% in 2003). This leads us to believe the drag on the economy may be more severe in magnitude than what we saw in 2003. However, a recovery may not be as speedy, as China’s economy is now not only much larger in size but also growing at a more modest rate than the double-digit rate experienced 14 years ago.
Sectors such as travel, leisure, retail and select sub-segments of discretionary consumption will likely be directly impacted in the near term. As China has become an integral part of the global supply chain, any further extension of factory closures would raise risks related to temporary supply chain disruptions for multinational companies.
As we believe China’s economic growth will likely be affected for at least one or two quarters, the government may respond to a slowdown in the economy through stimulus measures such as interest rate cuts, or measures to encourage infrastructure spending and/or boost consumption. In early February, Chinese authorities announced the use of various monetary policy tools to ensure liquidity remains reasonably ample during the special period of virus control. In the very near term though, the government’s efforts will likely remain focused on containing the spread of the virus.
Medium to long term: Neutral.
While we monitor the situation, we currently believe the long-term growth outlook for China and Chinese equities remains unchanged. The mass adoption of technology, rising consumption and premiumization (rising consumer demand for premium goods), manufacturing upgrades and government reforms should help the country emerge from this challenging period stronger and more self-reliant, with multiple pillars of economic support.
Likewise, we remain positive about the prospects for Asian equities in the long run, with a focus on quality names with sustainable earnings power.
Our View on the Equity Market Implications
- The current outbreak is occurring after a year of strong performance in equity markets (with the S&P 500 Index, MSCI All Country World Index (ACWI) and MSCI China Index up by 29%, 27% and 24% in 2019, respectively)3, taking some markets to new highs. Asian equity markets have already corrected from their mid-January 2020 peak, but a further correction could occur as uncertainty persists in the coming weeks and markets continue to consolidate after a period of strong performance.
- Given expectations of further escalation in the numbers of infections and deaths related to the coronavirus, anxiety, nervousness and market pessimism internationally should reamain high in the short term.
- We would note that the market correction during the SARS outbreak was relatively short-lived. Markets had even gained between the start of the epidemic (when the WHO was notified) to the end of the SARS episode in July 2003. We would, however, caveat this by noting that in contrast to the current situation, the SARS episode followed a period of equity market downturn, which troughed in late 2002 (S&P 500 Index)-early 2003 (MSCI ACWI) before a multi-year recovery.
In sum, the situation remains fluid and may further worsen in the near term. The rapid development of the 2019 coronavirus has brought some uncertainty to the near-term global growth outlook. However, in our current assessment, downside risks are biased toward the short term, while our long-term market and economic outlook remains intact.
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1. World Health Organization Novel Coronavirus Situation Report, as of January 28, 2020.
2. Source: World Health Organization Cumulative Number of Reported Probable Cases of SARS, July 2003.
3. Sources: S&P Dow Jones Indices, MSCI. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.