The outbreak of Coronavirus in Wuhan province of China looks to unsettle the goods achieved by the global financial markets, particularly after the trade deal between the US and China.
Post the deal announcement, Asian equity markets (MSCI Asia ex-Japan) are up 9% since the start of December, as investors turned risk-on.
But the rally came to a halt on 20 January over mounting investor fears that the Coronavirus (pneumonia) outbreak, might turn into a larger epidemic and stunt consumption, travel, and tourism-related sectors.
Investors are concerned as the number of probable and confirmed cases increases, especially with the Lunar New Year festival only days away, during which an expected 450 million people will travel across China.
Earlier today, the government suspended transport networks in Wuhan, strengthening its efforts to contain the outbreak.
Any significant outbreak would pose downside risks to Asia’s economic recovery prospects.
Analyst were expecting January-March quarter to mark the turnaround point for GDP and corporate earnings growth in Asia.
But if the situation deteriorates, the turnaround time might be delayed by a quarter.
The above view is based on the time taken to contain any potential outbreak, which may have a drag on discretionary spending.
However, easy policy and the global recovery in prospect argue for a strong rebound following any dip in economic growth – as was the case during the SARS epidemic in 2003.
The economic fallout will probably be less in magnitude than in 2003 when SARS spread across the region, due to the less virulence and lower mortality rate observed so far.
The current outbreak may get worse before it gets better and could produce substantial, though temporary, drops in domestic spending.
The last epidemic to upset Asian markets was the SARS outbreak in 1Q–2Q03. The virus became an international emergency after the Lunar New Year in 2003, even though it had really started in late 2002.
China’s GDP growth slowed sharply from over 12% q/q in 1Q03 to 3.5% q/q in 2Q03, while year-on-year growth IP and FAI weren’t affected much dropped by 2ppt to 9.1%.
Growth then quickly recovered to over 10% both q/q and y/y in 2H03 as the epidemic faded and thanks to the accommodative policy.
The impact was particularly harsh on retail sales growth, which decelerated to 6.8% y/y in 2Q03 from 9.2% y/y in 1Q03. The transport and hospitality sectors also suffered.
China’s industrial production, fixed-asset investment, and the property sector escaped relatively unscathed, partly due to the strong monetary and fiscal support launched at that time.
When outbreaks turn into epidemics, the general pattern is to stop discretionary spending on tourism and dining.
Hence, retail sales and visitor arrivals may see steep plunges across the region. Trade, however, tends to be less affected, so the rebound in Asian trade growth driven by tech and the end of tariff hikes should proceed in the background.
As regards India, the local investors may have little to worry about.
The past trend shows that markets have declined in the first month of the outbreak of the major epidemics globally, but they have strongly bounced back within six months.
For instance, when the Ebola virus disease (EVD) outbreak in the Democratic Republic of the Congo in October 2018, the MSCI World index fell 7% and 3.5% respectively in one month and six months periods.
However, Sensex, which fell 5% in the first month, recovered nearly 7% within six months. Except in the case of the cholera outbreak in November 2010 and pneumonic plague in September 1994, the Indian market has bounced back strongly.
What would be interesting to note from this event is the real impact this could have on some of the Chinese businesses which may shift to India as businessmen will not travel to China and will be apprehensive about the contamination and spread of the virus via goods imported from China where human contact is involved. Eg apparel, toys, footwear, accessories, and other consumer goods, etc.
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