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Coronavirus and Investors: keep watch, keep calm

Following a very strong start to the year for the markets, the latest flu outbreak has triggered some selling. Given the uncertain nature of the outcome of a flu virus, it can attract concerning headlines.

The Coronavirus is slowly jumping international borders after its initial spread in China. Known for creating illnesses, there is currently a new coronavirus affecting people who have recently been in the city of Wuhan, China.

This is a rapidly evolving situation and there remains “much to learn” about how it is spread, its severity, and best treatment.

The World Health Organisation (WHO) has now agreed that the outbreak meets the criteria for a public health emergency of international concern. This means that WHO can coordinate the global response by advising countries on public health measures and recommending travel bans.

While it is impossible to know exactly how much more the virus can spread, most epidemics have taken 6-18 months to fully run their course before growth rates slow and the actions taken by authorities (hygiene, quarantine, banning gatherings, preventing travel) start having an impact.

At this stage, the situation is evolving. Share markets have been hit, especially in Asia, however Australian and US shares have been more resilient.

Authorities have been proactive in taking steps to contain the spread of the virus, including closing transport in Wuhan and cancelling celebrations for the lunar new year.

Its spread has impacted confidence, and is now showing signs of having a material impact on tourism, as travel to and from China is restricted.

Comparing the Coronavirus spread to the SARS outbreak of 2003 is useful. The SARS outbreak infected 8000 people and killed 813 people with a mortality rate of 9.6%. At this point the coronavirus has a mortality rate of 3.2%—so looks less severe, however it is still in the early stages.

During SARS, the Chinese Government were secretive and tried to hide the fact until it was too late. The quick reaction by Chinese authorities and greater transparency this time has led to a more aggressive approach to containing the virus including locking down a city with 11 million people, which is reason for optimism from a market perspective.

However, GDP in Hong Kong and Singapore in the June quarter 2003 fell by over 2% as people stayed home (lower retail sales), missed work and travel was cancelled. Compounding the slowdown is the impact that the spread of the virus coinciding with the lunar new year, and the associated spending that goes with it (travel, eating out, retail sales).

Historically, stocks and economies recover quite quickly from these type of events. From an economic perspective SARS took around 1% off the economic growth in 2003 but had no lasting impact on the economy. For stocks exposed to tourism and China there can be a short term hit to profits but it is expected to not be long lasting.

In Australia, there will be a temporary disruption to tourism, education and exports (particularly commodities and to a lesser extent agriculture). Chinese tourist and education arrivals make up around 20% of total arrivals – a significant chunk. Compounded by the bushfires, the total negative impact to March quarter GDP growth could be around 0.5% which is a decent amount.

In summary, investors should be alarmed but not panicked just yet. Markets have been impacted by similar situations before, like SARS, and have recovered. However the concern about the spread of the Coronavirus will keep investors cautious and markets volatile in the near-term given the disruption to economic activity. It is expected that concerns regarding the virus to remain at the forefront of markets until signs that the growth rate has peaked.

Source(s): AMP Capital & Alpine Macro

Harpel Financial Group