LGT Vestra - Weekly snapshot: Coronavirus further comment

Wednesday 26 February, 2020

While the spread of the COVID-19 coronavirus appears to have slowed, the cases in Italy and Iran have raised fears of a global pandemic and driven the sharp falls we have seen in equity markets this week.  The US authorities last night cautioned that a pandemic was likely, and they should prepare for more cases in there.

In Italy around 50,000 people in the region of Lombardy and Veneto have been quarantined. The problem here is that they have not been able to identify any individual as the source of this outbreak so cannot be sure who has come into contact with the virus.

The outbreak in Iran has led to a number of cases elsewhere in the Middle East. The outbreak is concentrated in the holy city of Qom. The closure of the shrine of Fatima Bint Musa, which is seen as the second holiest Shia site in Iran, would be difficult on religious grounds. On Tuesday morning there were still large crowds of visitors reported around the shrine, making the spread of the disease more likely.

The outbreak in South Korea is also a concern, but here the source has been identified which should make it easier to control.

When looking at the potential macroeconomic impact, economists will tend to look at historic events for comparison. There has been lots of analysis of the SARS- coronavirus outbreak in 2002, when the economic damage turned out to be limited and the recovery sharp. Apart from being from the coronavirus name, the path of this infection and the economic impact is likely to be very different for the following reasons.

On the downside relative to SARS:

• COVID-19 appears to be much more infectious than SARS so far over ten times as many cases confirmed

• It may be spread by people who do not show symptoms

• China is a much larger part of the global economy than in 2002
  34% of global passenger car sales in 2019 against 7% in 2002
  34% of semiconductor sales against 5% in 2002
  64% of Iron ore imports against 21% in 2002

• Chinese manufacturers are now an integral part of the supply chain for many companies which was not the case in 2002

• Chinese people now travel much more widely facilitating the spread of the virus

On the upside relative to SARS:

• The mortality rate appears to be significantly lower than SARS (about 3% vs 9%) 
• Medical research is moving much faster, a vaccine has been developed for testing 
• Treatments for virus infections has improved
• Detection systems are faster and more efficient
• The Chinese authorities reaction, while far from perfect, was much swifter and more open than before 
• Unprecedented steps have been taken worldwide to try and contain the spread

Also on the positive side for equity markets:

• The Chinese central bank has moved to add liquidity
• Bond yields have fallen and the Federal Reserve is expected to cut rates if the situation deteriorates 
• US have announced $2.5billion spending allocated to counter the spread

When equity markets settle, they will go back to looking ahead. In a years' time there could be a vaccine in place and this particular crisis may be over. In the meantime, central banks will probably have added more liquidity and bond yields should still be low, if not as low as they are today. When that happens, investors will realise that equity markets are still the place with the best long-term returns. 

 

 

 

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