Outbreak has hit investor sentiment
Fears about the coronavirus and its impact on markets and investments have spread, and this is causing uncertainty amongst investors.
According to Azad Zangana, Senior European Economist and Strategist at Schroders, China is acting fast to contain the spread of the coronavirus, but the risk of economic disruption is high.
What will be the economic impact?
“Concerns over the spread of the coronavirus are escalating as the death toll continues to rise. Travel restrictions have been introduced in an effort to contain the outbreak,” said Zangana.
“The outbreak has hit investor sentiment as risk assets such as shares struggle and demand for safe haven assets (i.e. those investors tend to favour in times of uncertainty, such as gold and government bonds) has risen,” added Zangana.
“The disruption to demand caused by the coronavirus outbreak is not only significant for China, but for the global economy, and the disruption to supply chains is just as important, if not more so. The best historic event for comparison was the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2002-2003. SARS lasted for around nine months and killed 800 people. Academic studies estimate that SARS caused China’s GDP growth to decline by one to two percentage points. By comparison, we are only weeks into the coronavirus outbreak, but the Chinese authorities have acted faster to restrict travel. Despite their best efforts, the coronavirus is spreading faster due to being infectious during the longer incubation period (before the appearance of the first symptoms,” continued Zangana.
“Restrictions on travel and the concerns of the general public will likely dampen household demand in China, as well as reduce tourism. Combined with the potential delay in businesses returning to normal output, the risk of China’s growth falling below 6% year-on-year in the first quarter is rising. For the rest of the world, given the subdued levels of growth, the potential disruption caused in coming months could have a widespread effect. China is now more important to the world economy than ever. At the time of the SARS outbreak in 2002, China made up 4.2% of the global economy, and contributed 18% to world GDP growth. By 2018, its share of world GDP had risen to 15.8%, with 35% of global growth coming from China,” said Zangana.
Zangana concluded, “If the outbreak continues for a significant length of time, the levels of disruption will negatively impact trade partners, especially the rest of Asia, Australia, and potentially Europe. The recovery in global manufacturing, which has just started, is now in danger of being derailed. For policymakers, the primary objective is to contain the outbreak as quickly as possible. Governments may step in to support demand in China and businesses elsewhere. Meanwhile, where central banks still have room to manoeuvre, they may be called upon to ease policy further.”
The outbreak has rattled markets
Sanisha Packirisamy, Economist at Momentum Investments pointed out that the outbreak has rattled markets.
“Jitters over the outbreak drove a rally in global bond markets in January 2020 as investors sought out safer assets. The US 10-year government bond yield touched a three-month low of 1.57% during the month while the German 10-year government bond yield sank to its lowest level since October 2019,” said Packirisamy.
“Risk appetite towards EMs deteriorated in the second half of the month as investors moved away from riskier assets as the virus continued to spread. The MSCI EM Index was down 4.7% for January 2020 after running 18.4% higher in 2019. Asian and Latin American equity markets fell by less during the month, while losses were steepest for the Europe, Middle East and the Africa (EMEA) region. The MSCI Asia Index shrank 4.5% in January 2020 after climbing 19.2% in 2019. After ending 2019 17.5% in the black, the MSCI Latin America Index dove 5.6% in the first month of the year as virus fears negatively affected risk appetite. The MSCI EMEA Index retreated 4.8% in the first month of the year after rising 15.5% in 2019 as panic over the epidemic spread to Russian markets, offsetting gains seen earlier in the month on news that the Russian government would step up fiscal spending in a bid to strengthen growth. A knock to commodity prices in the first month of the year acted as a further drag on EMs. The Bloomberg Commodity Price Index sank 7.4% in January 2020 on fears of weaker growth in China following the epidemic,” added Packirisamy.
“The JPMorgan EM Bond Index (Embi) spread ended January 2020 22 points higher, partly undoing a recovery of 157 points in 2019. The biggest deterioration in sovereign credit quality was observed in China due to the virus outbreak, where the credit default swap (CDS) spread rose 36% in January 2020. Notable monthly deteriorations in the CDS spread were also seen in South Korea, Philippines and Argentina. The JPMorgan EM Currency Index staged a softer reaction and ended the first month of the year 2.6% weaker. A dent in risk appetite caused by the virus left the Rand as the worst performing currency against the US dollar for January 2020,” continued Packirisamy.
“Virus fears have rattled markets, sending flows in the direction of safe haven assets, leaving riskier assets on the back foot,” concluded Packirisamy.
Writer’s Thoughts:
We know the economic risk is high. As mentioned above, restrictions on travel and the concerns of the general public will likely dampen household demand in China, as well as reduce tourism. If the outbreak continues for a significant length of time, the levels of disruption will negatively impact trade partners, especially the rest of Asia, Australia, and potentially Europe. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
