The Wuhan coronavirus outbreak began with 50 known cases in mainland China in December.
What does the coronavirus mean for equities?
Investors are no doubt thinking back to previous pandemics like SARS, which spread to over 8,000 patients over a nine-month period before being vanquished in 2003. While markets were jumpy at the beginning of the SARS outbreak, the ultimate economic effects were minimal. Growth in China dipped briefly and then rebounded; the impact on the rest of the world was negligible. But that was in 2003, when China accounted for 4% of global growth. That number has since increased to 16%. For that matter, coronavirus infections and fatalites have far surpassed those of SARS. One epidemic may not hold as many lessons for another epidemic as investors would like to believe.
Global equity performance during the SARS epidemic
For illustrative purposes only. It is not possible to invest directly in an index. Not a recommendation to buy or sell any security.
It’s difficult to predict at this point whether the coronavirus will create the global economic slowdown that the IMF fears. But it’s already disrupting supply chains around the world. Wuhan is the capital of Hubei province, a top global auto manufacturing hub. General Motors, Volkswagen, and Toyota have been forced to shut down their local factories while the city of 11 million remains locked down. Hyundai has become the first automaker to halt production outside China because of the virus; critical components built in Wuhan can’t get through to the company’s South Korea plants.
And this isn’t a problem just for automakers. Sourcing new facilities and parts at cost-competitive levels will prove challenging for any company operating in Wuhan. Companies as diverse as Airbus, Siemens, Apple, and Ericsson have been forced to delay product deliveries and set up crisis-management teams. Apple announced last week that it wouldn’t meet current quarter revenue projections; the outbreak has kept shoppers away from electronics stores and forced the company’s Chinese facilities to cut iPhone production.
What does the coronavirus mean for fixed income?
Past pandemics have followed a pattern of emergence, peak, and wane. Uncertainty of the timing and scope of the peak tends to promote risk-off behavior. This time is no different. Since reports of a sharp rise in cases in China on January 20, the 10-year Treasury yield has fallen from 1.82% to 1.58%, despite economic data indicating that the long US economic expansion will continue.
Concerned that the virus will slow the global economy, investors may be looking for central banks to step in. According to the CME FedWatch Tool, futures are predicting a 25 bps rate cut from the Federal Reserve by Q3 2020. Fed chairman Jerome Powell says to expect some economic effects in the US but adds that it’s too early to say if they’ll be persistent or material.