The new virus has affected tens of thousands of Chinese citizens and spread to over 40 countries. The respiratory infection has claimed 3000 lives so far and been declared a global emergency by the World Health Organisation (WHO). Infections of the virus, known as Covid-19 now, have been recorded in S. Korea, Iran, Italy, Japan, the US, Canada, France, Germany, and the UK- all the big economies, although cases are concentrated in Korea, Italy, and Iran. The US has declared it a public emergency and the UK, a ‘serious and imminent threat’.
China has introduced a number of tight restrictions in a bid to reduce infections, including cancelling flights, closing schools and workplaces and ordering some cities to go into lockdown. Wuhan, home to 11 million people, has been under lockdown since 23 January, with transport links into and out of the city closed. Perhaps that can only happen in China but it seems it’s working as new infections are falling. Once China is clear, there will remain a containment issue globally before eradication can occur.
A study of 44,000 Coronavirus cases by the Chinese Centre for Disease Control and Prevention found that more than 80% had been mild, with the sick and elderly most at risk, while 5% had been critical. The 2003 SARS outbreak only had 8000 cases but nearly 10% died. This new virus is 10 times larger so far but with a likely 2-3% fatality rate. In 2003, China’s economy was less than half its current size and today it is much more integrated into global supply chains. Is this a serious blow to the world economy? Yes. Factories can’t complete products if they don’t have components and people can’t go to work if quarantined. However, the economists we subscribe to estimate it could shave up to 0.5% off global GDP in a worst-case situation and could be even less if containment works. Eventually there will be an accelerating recovery as factories make up for lost time to satisfy pent up demand. It will take time for supply chains to get fully functional again so that would bring us to the fourth quarter of the year.
It is inevitable that short term profitability of many companies will be negatively affected. On the assumption that the virus plays itself out within months, it seems likely that business recommences as usual at some point. Of course, some marginal companies will go to the wall if cash flows are disrupted too long.
When you invest, you are taking a long-term view, usually 10 years plus. Over that period, this event, although tragic for everyone concerned, should be regarded as a temporary setback to the global economy. What’s happening now in markets is forced selling of geared positions by individuals and hedge funds. They were very geared up in order to magnify returns before markets began to weaken. In addition, a number of fund managers may cut some positions to satisfy withdrawals from funds and some multi asset funds may trim risk assets in hope of buying them back cheaper. We won’t be doing that. We have been underweight risk assets for a while now and generally look to top up into bouts of weakness.
This epidemic is likely to last for some months, possibly until Summer temperatures help rein it in. A serum is unlikely to come to market for many months but there may be some anti-viral drugs that can help alleviate symptoms and prevent deaths.
To put it in context, one billion people catch flu every year with between 290000 and 650000 deaths. This new virus clearly has a higher mortality rate but with the world on alert, containment will hopefully be superior. So, although things may get worse before they get better, stock markets should start to discount a return to normality well in advance.
Graham Frost
Chief Investment Officer
