Coronavirus outbreak rattles the world

The Coronavirus outbreak in mid-January has resulted in more than 930 deaths so far, most of them in China, which has quarantined more than 46 million people in an effort to contain the virus.

The hit on the Chinese economy is likely to be deep. The lockdown comes as China prepares to celebrate its New Year, a time when hundreds of millions of Chinese travel abroad. This will do fairly minor damage to SA’s tourism sector as only 100,000 Chinese visited the country in 2018, about 1% of the total. The figure should be much higher, but SA’s irrational visa policy – now largely overturned – required Chinese visitors to apply for visas in person at our consulate offices in that country.

Palladium prices measured in rands dropped 6% in recent days after a spectacular surge at the start of the year. The timing of the most recent drop appears linked to the Coronavirus outbreak, though palladium prices are still well above historical levels.

Oil prices tumbled over the last week as the impact of the Wuhan lockdown on global transport and tourism became apparent.

The JSE All Share index followed the general global trend down over concerns of economic spill-over in China, Europe and the US. The rand has weakened 4% since the start of the year, reflecting the general move away from perceived risk.

US-based Stansberry Research says airlines with long-haul flights into or out of China might suffer the most, along with luxury retailers with large footprints in China. Companies with significant connections to China – like Disney, McDonald’s, and Starbucks – said they’re suspending operations in the country, or enacting travel restrictions.

Every crisis creates opportunity for some, which explains the jump in gold to US$1,581/oz as investors head for safety.

Drug makers, particularly those with potential vaccines, saw stock prices surge on the possibility of fast-tracking regulatory approvals and shipping product to market in the next few months.

Jumping on this speculative bandwagon could be disastrous if history is any lesson. John Engel of Stansberry Research points out that several drug companies hyped their stock prices during the previous Zika and Ebola health crises with talk of imminent medical solutions, but left speculators nursing huge losses when they failed to deliver.

“The fact is, developing new therapeutics often takes years of development and clinical testing. And even then, it’s a gamble that it’ll prove effective and safe for use in people,” says Engel is a recent newsletter.

To take a punt on one of these drug companies is closer to gambling than investing, he adds. The following chart compares market reactions to Coronavirus and the 2003 SARS outbreak. It’s clear the impact of Coronavirus at the stage in the disease progress is far more subdued than was the case during the SARS outbreak.

The impact on the S&P 500 index has been muted so far, with analysts arguing that world is better prepared for health scares of this nature. Previous health scares were over-hyped and the markets eventually recover.

Graph: S&P 500 Index

Source: Share Magic

David Shapiro, deputy chairman of Sasfin Securities, expects the Coronavirus scare to blow over. “Let the media have its say. They love plagues, lice, boils, pestilence and so on. Bond traders too. They love to panic into safety. I understand the need to be careful and hopefully (the disease) will be contained. I don’t want to be complacent but I’m not taking action.”

Graph: Brent oil price in USD

Source: Share Magic

Steve Meintjies, head of JSE research at Momentum Securities, says platinum group metal prices have slipped in recent days over expectations of reduced vehicle sales. Luxury goods sales are also likely to suffer. “The Chinese authorities have extended the lunar holidays by three days, which will reduce economic output. The health scare will certainly impact global travel and transport sectors, but we may look back on this in a few years and see it as a blip on the screen. I expect the markets will rebound at some point.”

The epicenter of the health scare is Wuhan, a city of 11 million people and home to 230 foreign Fortune 500 companies. The city is also a transport hub connecting Beijing, Shanghai and Hong Kong by road, rail and air. The lockdown will have a devastating impact on local manufacturing, with CNBC reporting that local companies scrambling to find alternative supply chains for raw materials and other inputs.

The World Health Org has not yet declared this a global health crisis, but that may change in the coming days. Health authorities have drawn some comfort from the fact that the Coronavirus mortality rate among infected individuals is around 3%, against more than 10% for SARS.

As with previous health scares, this one should blow over fairly quickly, largely due to the aggressive action taken by Chinese authorities to contain the disease.

Source: moneyweb.co.za