What coronavirus may mean for global economy
We are closely monitoring the impact on emerging market economies and equity markets from the outbreak of the coronavirus in China and other parts of the world.
The situation is at an early stage and is evolving quickly. Both market and macro implications depend on the severity and duration of this epidemic episode.
What we know so far
Since the first cases of the 2019 Novel Coronavirus (2019-nCoV) were notified to the World Health Organisation (WHO) on December 31, 2019, more than 14380 confirmed cases have been reported in China, with 305 deaths.
1.Based on these reported figures, this coronavirus appears to be less fatal than Sars, with a less-than-3percent fatality rate so far. It also seems to be deadly for a more fragile segment of the population (typically older people with pre-existing health conditions). Detection and reporting are still in the early stages, and with an incubation period of up to 14 days and the Chinese New Year holiday factor, we expect to see further increases in the number of confirmed cases in the short term. While cases have been reported in several countries abroad, as of now, China still accounts for about 98percent of confirmed cases.
Comparatively, in 2003, the Sars virus affected more than 8000 individuals, causing more than 770 deaths, with a fatality rate exceeding 9percent over eight months, according to the WHO.
2.The virus infected people across 26 countries, including the US, Canada and a few European countries, although most cases were declared in Asia. While apparently less fatal, the 2019-nCoV virus seems to be significantly more contagious than Sars. According to WHO figures in China alone, the number of confirmed cases has been roughly doubling every two to three days since January 20. This suggests we are still some ways away from seeing a peak.
Wuhan, the epicentre for the 2019-nCOV outbreak, has a population of more than 11 million people, and around 60 international flights to over a dozen countries normally depart the city’s airport each week.
While travel restrictions have recently been put in place, risks of further international spread persist, and the reach and severity of the situation may not be known for another few weeks. China is much more integrated into the global economy than it was in 2003, and the number of Chinese nationals travelling all over the world has doubled over the same period, which raises the risks to the global economy and health.
The WHO on Friday declared the outbreak an international public emergency.
On the positive side, policy response has been significantly quicker and more proactive than during the Sars episode in 2003.
Chinese health authorities have shared information and raised awareness of the virus in a timelier manner. In addition, the government has taken stringent measures to curb the outbreak, including travel restrictions around Wuhan and multiple other cities, as well as extending the Chinese New Year holiday by three days.
Short term: negative
We think the current events will have a negative impact on sentiment as well as the economy in the short term. In China and Asia, near-term business activity and consumption will likely be significantly impacted as people curtail their movements as a preventive measure. This could result in a materially negative growth print. Our teams on the ground report that people in China have been cancelling travel plans, social interactions and outings, leaving restaurants, cinema theatres and hotels empty. There is much-reduced traffic in the transport hubs that are still in operation.
Consumption is a meaningfully more important contributor to the economy than it was in 2003 at the time of the Sars episode, and now accounts for more than 70 percent of China’s gross domestic product growth (versus less than 40 percent in 2003). This leads us to believe that the drag on the economy may be more severe in magnitude than what we saw in 2003. However, a recovery may not be as speedy, as China’s economy is now growing at a more modest rate than the double-digit rate experienced 14 years ago.
Sectors such as travel, leisure, retail and select sub-segments of discretionary consumption will likely be directly impacted in the near term. As China has become an integral part of the global supply chain, any further extension of factory closures would raise risks related to temporary supply chain disruptions for multinational companies.
As we believe China’s economic growth will likely be affected for at least one or two quarters, the government may respond to a slowdown in the economy through stimulus measures such as interest rate cuts, or measures to encourage infrastructure spending and/or boost consumption.
Medium to long term: neutral
While we monitor the situation, we currently believe the long-term growth outlook for China and Chinese equities remains unchanged.
The mass adoption of technology, rising consumption and premiumisation (rising consumer demand for premium goods), manufacturing upgrades and government reforms should help the country emerge from this challenging period stronger and more self-reliant, with multiple pillars of economic support. Likewise, we remain sanguine about the prospects for Asian equities in the long run, with a focus on quality names with sustainable earnings power.
Asian equity markets have already corrected by 4 percent to 6percent from their mid-January 2020 peak.
The current outbreak is occurring after a year of strong performance in equity markets, with the Standard & Poor’s 500 Index, the MSCI All Country World Index (ACWI) and the MSCI China Index up by 29percent, 27percent and 24percent in 2019, respectively, taking some markets to new highs.
This suggests that further correction could occur as uncertainty persists in the coming weeks and markets continue to consolidate after a period of strong performance.
Given expectations of further escalation in the numbers of infections and deaths related to the coronavirus, anxiety, nervousness and market pessimism internationally should increase globally in the short-term.
We would note that the market correction during the Sars outbreak was relatively short-lived. Markets had even gained between the start of the epidemic (when the WHO was notified) to the end of the Sars episode in July 2003.
We would, however, caveat this by noting that in contrast to the current situation, the Sars episode followed a period of equity market downturn, which troughed in late 2002 before a multi-year recovery.
In sum, the situation remains fluid and is expected to worsen in the near-term.
Manraj Sekhon is the chief investment officer at Franklin Templeton Emerging Markets Equity.