Fears of slowing economic growth have roiled financial markets since the outbreak of the coronavirus. The COVID-19 coronavirus strain, which started in Wuhan, China in December 2019 has now spread to at least 37 countries around the world. The initial financial market reaction was relatively muted outside of local Asian markets. However, since the spike in reported cases outside of China – particularly in countries such as Italy, Iran and South Korea – financial markets have experienced a major sell-off in equities and a rally in safe haven assets (Treasuries and gold). High yield credit markets have also been affected, in line with their beta to equities.
Historically, financial markets have been relatively immune to the effects of past epidemics. A temporary dip in equity prices tends to be followed by a resumption of an upward trend within a few months. While the 2003 SARS outbreak in China is an apt case study, the long-term economic and financial impact of the new coronavirus outbreak is still unknown.
Global financial markets have been under increased pressure since the escalation of COVID-19 coronavirus infections outside of mainland China. While China’s near-term economic growth will be significantly impacted, investors continue to reassess the global economic impact of the coronavirus.
On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization (“WHO”) declared the coronavirus outbreak a “public health emergency of international concern” (PHEIC). The concept of declaring global public health emergencies was formalized by the WHO after the 2003 SARS outbreak. Coronavirus is the sixth declaration over the past fifteen years.
It can be instructive to study the global equity market reaction after these incidences. Exhibit 1 shows the global equity market reaction after each of these PHEIC declarations, plus several other major health epidemics. Since the first major epidemic in 1994, the MSCI World Index gained an average 0.8% in the month after an epidemic was declared, 5.5% in the ensuing three-month period and 9.5% a half-year later.
Exhibit 1: Health Epidemics and MSCI World Index Performance(1)
MSCI World Index Returns(1)
(1 Source: Bloomberg)
Many prior epidemics and fast-moving diseases have been non-events for global equity markets. Looking at the thirteen past global health crises shown in Exhibit 1, in all but one instance equity markets were positive from the three months leading up to the declaration of the global health crisis through the six months after. Since the start of the coronavirus on January 20, 2020 through February 25, 2020 the MSCI World Index is down 5.92%.
The most common comparison of a recent health crisis has been with SARS. SARS, which first emerged in China’s Guangdong province in February 2003, infected about 8,000 people and claimed almost 800 lives worldwide. The outbreak lasted approximately six months as the disease spread to more than two dozen countries in North America, South America, Europe, and Asia before it was contained by July 2003. The outbreaks led to severe corrections in local Asian stock markets but had a limited impact on global equity markets. The MSCI All Country World (ACWI) Index recouped its losses in just over a month and rallied strongly thereafter, as shown in Exhibit 2. In the case of the coronavirus, the global equity markets recovered losses after the initial confirmation but turned down sharply as the number of cases outside of China has grown.
Exhibit 2: MSCI ACWI Performance After Outbreak of SARS and Coronavirus(2)
As of February 25, 2020
(2 Source: Bloomberg; Note: SARS data series starts February 10, 2003 when China notified the World Health Organization (WHO) about the outbreak. Coronavirus data series starts January 20, 2020 when Johns Hopkins
confirmed the first cases. )
Although comparing the 2020 coronavirus outbreak to the 2003 SARS epidemic can be useful, there are differences between the two periods to consider. First, China is a much bigger part of the global economy and markets than it was 17 years ago. China has grown from the world’s sixth-largest economy to the second biggest today and its share of the MSCI Emerging Markets Index has risen to 34% from 8% in 2003. China also plays a much more important role in the global supply chain where a sustained interruption will have a meaningful trickle-down effect. Second, the coronavirus has spread wider and more rapidly than SARS and is now impacting economies in Europe, Japan, and South Korea. While the fatality rate for the coronavirus is lower than for SARS, the world economy is more integrated today, and we are already seeing extensive travel bans.
The full impact of the coronavirus on the global economy and financial markets is still unclear. However, past instances of global health crises have not had long-lasting detrimental impacts on equity markets.
SteelPeak Wealth –
Institute of Portfolio Management & Economic Strategy
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