Paul O’Connor, Head of Multi-Asset – Janus Henderson
Coronavirus contagion concerns
Financial markets remain highly focused on the fast-spreading Wuhan Novel Coronavirus. Today’s 8% drop in the Shanghai Composite Index, as Chinese stock markets reopen after a week’s suspension, is stark measure of the impact of this epidemic on investor sentiment. Chinese authorities have made significant attempts to stabilise financial markets, announcing an impressive range of policy initiatives over the weekend, but even these could not overcome the adverse impact of coronavirus concerns.
As things stand, many important biological characteristics of the Wuhan coronavirus are still poorly understood. While some commentators have drawn analogies between the current outbreak and other coronavirus epidemics, such as SARS (severe acute respiratory syndrome) and MERS (Middle East respiratory syndrome), these comparisons are of limited value. For one thing, the Wuhan virus has already spread well beyond the coverage of those epidemics. In just three weeks the number of lab-confirmed cases of the Wuhan coronavirus has risen from 50 to over 17,000 (see chart 1) and is expected to grow substantially beyond this.
Chart 1: Growth of the Wuhan Novel Coronavirus
Source: Worldometers.info, Janus Henderson Investors, 3 February 2020.
The number of confirmed cases of SARS peaked at just over 8,000 in 2003, while MERS cases are estimated at just below 2,500. Fatality rates are also very different. While it is still too early to reliably estimate the fatality rate of the current virus, the best guess from the World Health Organisation (WHO) is that it could be around 2%, thankfully much lower than the 10% rate of SARS and 34% for MERS.
One important uncertainty surrounding the current virus is the question of when infected individuals become contagious. In instances of SARS and MERS, infected individuals were not contagious until they developed symptoms. However, cases have already been confirmed of transmission of the Wuhan coronavirus from individuals who were showing no symptoms. While the World Health Organisation reports that this sort of transmission type “may be rare”, any evidence that it is more prevalent would be ominous in terms of the potential contagion dynamics. The uncertainty surrounding the incubation period, which is estimated to be between 2 to 14 days, is also another complicating factor here.
Wide range of outcomes
Against this backdrop, it remains very difficult to predict how the coronavirus epidemic will impact global growth. The measures taken in China to contain the virus will undoubtedly have a significant impact on economic activity in the short term. Most forecasters expect that China GDP growth in Q1 is likely to dip by 1% to 2% from the 6% annual growth rate that was prevailing before the virus appeared. However, there is still a wide range of plausible economic scenarios for China, depending on how the virus evolves. If the infection rate slows in the next few weeks and quarantine measures can be lifted, Chinese growth could quickly rebound, reinforced by a widely expected range of policy stimulus measures. If infection rates continue to rise, then quarantine measures will almost certainly be extended, with more limitations being imposed on travel, a prolonged period of industrial closures in China and more significant economic spillovers to the rest of the world.
Given the breadth of the potential biological and economic outcomes of the Wuhan Novel Coronavirus, financial markets are likely to remain highly sensitive to the daily reports of the number of confirmed cases and deaths. Expectations could quickly shift towards benign scenarios, involving infection rates peaking and economic sentiment rebounding or to catastrophic ones involving viral mutations and a fast-spreading global pandemic. Financial market sentiment on this topic is unlikely to sustainably improve until there is some evidence that the lethality of the coronavirus is being contained. The virus-related pullback in most risk assets has been fairly modest so far, compared to the big rallies enjoyed over the previous four months. Barring disastrous biological outcomes, we believe that the coronavirus outbreak has the scope to create buying opportunities in risk assets. But it seems too early to be rebuilding exposures now, given how modest the market correction has been, the momentum of the virus’ progression and many biological uncertainties surrounding this epidemic.