Markets Upset From China Virus Is Only Getting Larger

(Bloomberg) -- You might not know it to glance at the slightly muddled, muted trading across U.S. equity futures and European assets on Thursday, but concern over the virus that roiled global markets at the start of the week is only growing.

China has expanded travel restrictions a day after halting transit in and out of a city bigger than London. Macau canceled all of its Lunar New Year festivities. The virus has already spread from the mainland to locations from Hong Kong to the U.S. It all triggered a miserable day in the Chinese equity market, the last before the nation’s long annual holiday. In fact it was the worst eve of a Lunar New Year the market has seen. Many other Asian gauges tracked the declines.

The challenge for investors and traders in Asia and beyond is a relative lack of precedents. The go-to comparison is the SARS outbreak of 2003, with which this epidemic shares characteristics. But not all the market lessons are valid for investors reacting to the Wuhan coronavirus now, and the risks may be greater than many realize.

Rabobank strategists warned its a parallel that doesn’t hold because China’s place in the world has changed in the last 17 years. The country’s share of world GDP was 15.8% in 2018 compared with 4.3% in 2003 while its post-crisis debt binge generated around 50% of global growth since 2008, according to Rabobank estimates.

“Investors’ evident sensitivity to this issue is very well-placed,” Rabobank strategists led by Richard McGuire wrote in a note Thursday.

What follows is a summary of the Bloomberg Markets Live team’s most recent analysis of the evolving situation:

U.S. Stock Exposure

Comparisons to the SARS epidemic of 17 years ago are giving traders confidence that U.S. stocks won’t be too affected and that the regional economic impact will not be long-lasting. While Asia markets suffered acute losses during the outbreak, most recovered to have record years. Even within the region, there were havens back then that again have idiosyncratic stories to bolster their case today.

Read more:

• Virus Haven Seekers May Look to India, New Zealand Stocks
• History Says U.S. Stocks Can Be Resilient Amid Coronavirus Fears

There are problems with those comparisons. The Chinese economy is approximately 10-times the size it was in November 2002 (when the SARS virus first showed up in humans) and is far more relevant to the global economy. China is the largest consumer of almost every commodity in the world and is the key marginal trade partner for the majority of countries.

Not only does any stumble in China’s economy have a much larger knock-on impact globally, but the greatly increased focus on the services sector means that China itself is far more vulnerable to declining consumer sentiment than when it was just an export-focused factory economy. And few would argue with the contention that China’s growth stabilization has been a key pillar to the aggressive risk-on narrative of recent months.

Read more:

• EM Stocks Pain Reflects China’s Bigger World GDP Role Than 2003
• China’s Economy Facing Another Body Blow From Virus

A Cloudy Comparison

Any broader market takeaways from the past are further clouded by the coincidence of the U.S. invasion of Iraq in March 2003, just as SARS was exploding onto the public consciousness globally.

Read more:

• Hedging Lessons From SARS 2003 Obscured by Iraq Invasion

While the perspective of history shows impressive multi-year rallies for most Asian equity markets in the wake of SARS, that observation is overly simplified on three fronts.

Global markets were in the early stages of a long rebound from the 2001 U.S. recession, while Asia assets were still perceived as discounted in the wake of the 1997 crisis and amid China’s economic revolution. Most importantly, Asia stock markets didn’t bottom-out in 2003 until the number of new infection cases declined.

Read more:

• Asian Assets Will Struggle Until Infection Cases Peak

Holiday Headache

The corollary is that markets won’t be able to move beyond this story until a vaccine is discovered and hence the tail risk of a pandemic is ruled out.

In the interim, the Lunar New Year will only increase uncertainty as accurate statistics on the spread and intensity of the virus won’t be available until after the holidays.

Read more:

• Uncertainty Is Why Coronavirus Matters to Markets

--With assistance from Garfield Reynolds, Laura Cooper, Abhishek Vishnoi, Mark Cranfield, Ye Xie, Todd White, Sofia Horta e Costa and April Ma.

To contact the reporter on this story: Mark Cudmore in Singapore at mcudmore8@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Cecile Gutscher

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