Coronavirus: Markets Wake-Up To The Risks

It is too early to be certain on the relative infectiousness or mortality rate of the new coronavirus first observed in China in early December. Nevertheless, there have been close to 3,000 confirmed cases and 40m people in China currently facing travel restrictions as authorities attempt to control the spread of the virus. At the present time, in our view the key for investors is to focus on the economic costs of controlling the outbreak, rather than fearing mass panic. A downgrade to Chinese GDP for Q120 appears likely. Until cases have peaked, we believe travel and entertainment sectors are at risk of underperformance.

It was a surprise to us just how resilient markets had been in the face of adverse coronavirus headlines, given the precedent of SARS and its impact on markets in 2003. At this early stage, while basic parameters such as the R0 value (the number of new infections per infected human) and mortality rate are subject to a high degree of uncertainty, it is a fact that in China 40m people already face significant travel restrictions.

Indications are that the outbreak is at the relatively early stages in China and it will take some time to bring it under control there. Nevertheless, while there have been some cases outside China there does not appear at this stage to be an epidemic of viral pneumonia in other nations – where public trust in data collection and case reporting is relatively higher.

The number of reported cases is likely to escalate sharply as the awareness of the disease grows but estimates of the mortality rate also decline as testing becomes more widespread for milder cases. In particular, China’s current reported case mortality rate of 2.9% may significantly overstate the actual danger from infection if there is a much larger number of undiagnosed and minor cases.

On the critical assumption that the mortality rate is no worse than other viral respiratory diseases such as influenza, scenarios of mass panic are less likely to develop. Work to find a vaccine, building on the research for a SARS vaccine may bear fruit within a 2-year period. In such a scenario, economies will be impacted by the measures taken to reduce transmission but provided these are not as draconian as those currently imposed in China the economic impact would be relatively modest.

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