Coronavirus fear goes viral in the markets

Investors should tread carefully, but there is no need to panic

(Image credit: 2020 Getty Images)

published 30 January 2020

“From one food market to global panic”, say Emma Graham-Harrison and Michael Standaert in The Observer. The coronavirus, 2019-nCoV, which is thought to have originated in a seafood market in the Chinese city of Wuhan, has prompted a public health emergency in the world’s second-biggest economy. There are 50 million people in quarantined lockdown.

Unhappy New Year

News that Hong Kong will suspend cross-border trains and ferries has compounded the market panic. America’s S&P 500 fell by 1.6% on Monday, its biggest one-day drop since October, say Matt Phillips and Katie Robertson in The New York Times. The pan-European Stoxx Europe 600 index fell by 2.3%, with travel companies particularly hard hit. The Hang Seng fell by almost 3% on Wednesday, its first day of trading after the New Year holiday. Mainland China’s markets are closed until next week but a 3.1% plunge in Seoul’s Kospi index early this week suggests that they are due a battering.

The new virus is bringing back memories of the 2003 Sars epidemic, says Nathaniel Taplin in The Wall Street Journal. That saw year-on-year retail sales growth plunge by 50% in China and cost the world economy $40bn. This time around things could be even worse. China’s infrastructure is far better than it was in 2003 – helping the new strain spread more quickly. In the early 2000s consumer spending accounted for 40%-50% of Chinese growth, today that figure is 60%. The greater importance of the service sector, which is acutely vulnerable to downturns in tourism and consumption, bodes ill. “There is no longer any doubt” that the epidemic will hit Chinese GDP growth in the first quarter, says Edward Glossop for Capital Economics. The question is how far the damage will spread. The likes of Hong Kong and Thailand will see a drop in Chinese tourist receipts. However, the stability of emerging market currencies so far suggests that the fallout beyond Asia may be limited.

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These market jitters have followed a well-worn pattern, says John Authers on Bloomberg. As with previous disease scares, there is “sell-off” and a “crescendo” of worry until “the outbreak comes under control”. Historically, this has then been followed by a nice recovery in stocks. Yet the latest losses may be about more than the virus. The scary headlines are catalysing broader concern that markets got carried away last year and global growth will disappoint in 2020. My advice? “Don’t panic”, but “that’s a long way from saying ‘don’t worry’” at all.

“Paranoia is a natural reaction” to disease epidemics, writes Jim Armitage in the Evening Standard. Yet “the true impact of such outbreaks” is rarely as bad as feared. In 2003 the Chinese stockmarket bounced back just six months after the Sars epidemic. Authorities learnt lessons from that episode and have reacted more quickly and transparently to contain the new coronavirus. “Investors shouldn’t turn a scare into a panic.”

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.