The spread of China’s coronavirus has caused equities to fall across the globe but now is not the time for investors to panic and flee risk assets, according to market commentators. 
More than 100 people have died from the outbreak of Wuhan coronavirus, which is from the large family of virus that includes the common cold as well as illnesses such as severe acute respiratory syndrome (SARS) and Middle Eastern respiratory syndrome (MERS).
While the majority of cases so far have been restricted to China, it has been detected in the US, France, Malaysia and several other countries and there are concerns that the virus could mutate to spread more easily between people.
Stock markets hit a slump in Monday’s session as investors reacted to the uncertainty of how far and fast the virus will spread, the human cost it could exact and its ultimate impact, if any, on the global economy.
Coronavirus cases outside of China
Source: BBC Research, as at 27 Jan 2019
While it is tragic that people have died from the outbreak and thousands more are suspected to have the virus, professional investors have cautioned against any knee-jerk reactions to its spread.
George Lagarias, chief economist at Mazars, noted that there is no real insight into details such as the strength of Wuhan coronavirus and its contagion rate.
But this lack of clarity means markets will always worry that a new pandemic could have the impact of an extreme outbreak like the 1918 Spanish Influenza, which killed about 3 to 5 per cent of the world’s population.
Given the uncertainty, investors should be prepared for further bad news linked to coronavirus to appear over the coming weeks. “The virus is spreading and there’s a strong probability that more people might lose their lives before the spread fizzles out,” he explained.
Lagarias added that the market impact will be worse if coronavirus is found in western markets such as New York, London or Paris: “Traders are human beings and as such tend to become edgier when a global pandemic is at their own doorstep.”
Finally, at each different stage of the Wuhan coronavirus outbreak, investors should be asking themselves if this event has the real potential of ending the current economic cycle.
“If the answer is ‘yes’, that the virus is strong enough to end this economic and financial expansion, then it is also probably strong enough to cause major disruption in our daily lives and political systems, in which case all bets are off and investments become an afterthought,” the Mazars chief economist said.
“But, as is the most likely case, if modern medicine and containment tactics succeed as they have done some many times in the past, then investors may be best served by remembering that volatility may be a tactical opportunity for those waiting to buy at lower prices. Consumption has taken a hit in the past in similar events, but it has turned out to be short term.”
Rupert Thompson, chief investment officer at Kingswood, said there is currently no evidence that the Wuhan coronavirus will have a meaningful impact on the global economy or stock market.
When assessing the potential economic and market impact, he said that the SARS outbreak of 2003 that killed almost 800 people offers a useful comparison.
Mortality rates from the new coronavirus appear to be lower than with SARS but the new virus – unlike SARS – is infectious before symptoms emerge, which could increase the risk of it spreading.
The SARS outbreak of 2003 hit Chinese growth and equities, but both were able to rebound within months of the epidemic ending. The effect on global equities was minimal, reflecting the fact that it was largely a local event.
Of course, the Chinese economy is much larger and much more connected with the global economy these days. China’s government has imposed strict measures to halt the spread of the virus, which is likely to have a “considerable” short-term impact on its economy.
“As far as the global economy is concerned, we don’t at this stage believe this hit is large enough to merit altering our base case. We continue to expect global growth to recover a little over the coming year on the back of the relaxation of monetary policy and easing in trade tensions,” Thompson continued.
“As for global equities, the risk is clearly that the news gets worse before it gets better and the market correction could well have further to run as a result. Indeed, corrections of 5-10 per cent are surprisingly common.
“In the past, however, even when global health scares have impacted markets, the effect has been short-lived. At the peak of Ebola fears in 2014, global equities fell back 9 per cent over the course of a month but had recouped these losses within weeks.”
Performance of global equities in 2014
Source: FE Analytics
That said, not all market commentators are as sanguine in their outlooks.
Jim Wood-Smith, chief investment officer for private clients at Hawksmoor Investment Management, highlighted the relatively low fatality rate that the Wuhan coronavirus thankfully seems to have.
At the time of writing, there were have been approximately 2,700 cases for the coronavirus and 80 deaths, giving it a survival rate of 97 per cent. Wood-Smith contrasted this with tuberculosis, which caused 1.5 million deaths in 2018 from around 10 million people reported as being ill – giving a fatality rate of 15 per cent.
“At this stage, coronavirus would appear to be a triumph of hype over reality,” he added.
That’s not to say that he expects markets to push through the outbreak without challenges, though. The chief investment officer argued that the strong performance of stock markets left year has primed them for a fall, whatever the cause.
“[Coronavirus] has coincided with a time when markets desperately needed an excuse to boil over. We have stressed … that 2019 ended on a burst of over-optimism, with American equities in particular becoming very overbought,” Wood-Smith said.
“Markets need to take a step back, have a pause for breath, take their foot off the gas. They are over-heated and need to cool down. Gravity and reality need to take hold, a period of catch-up is needed, a correction is overdue.”