The Impact of the Coronavirus
The coronavirus, now COVID-19, has had a major impact on global markets over the past week, with US markets falling around 12% for the week, the worst weekly decline since September 2008.
The number of confirmed cases is over 88,000 as at 2 March 2020 with major breakouts outside of China, notably in South Korea, Italy and Iran. While the fatality rate is significantly lower than SARS in 2003, it is spreading much quicker and countries are scrambling to get it under control.
The economic impact of the virus remains uncertain and depends on the duration and eventual seriousness of the outbreak. China’s GDP is expected to drop by 2% if they can get the spread under control by the end of March, but if not, they are in danger of going into their first recession in 30 years. As China is the world’s second largest economy, this has a knock on effect on global growth as a whole and further quarantines and lockdowns could result in global GDP being negative for Q1 for the first time since 2008. The initial impact has been reflected in lower household consumption, travel, tourism and entertainment services, spreading to production, the management of various supply chains and the demand for commodities e.g. oil.
The big concern is that the virus will spread quickly in Europe and the United States, further slowing down global growth. There is also concern that developing countries may not have the resources to control the spread.
To increase demand the Fed is likely to cut interest rates to boost the economy but financial stimulus can only do so much, if labour and resources are delayed, many companies will have disruptions to their business and lower profits as a result.
During uncertainty like this, markets can over react and it is important not to make emotional decisions and try to time the market as it can often rebound just as quickly. The drop has been widespread across the market, with some stocks that should do better during this time being hit equally as bad. Riding out the volatility with tried and trusted portfolio managers should give better results, as it is during these times when selective stock picking of quality businesses pays off.