The SARS Comparisons Don’t Work But It’s All Wall Street Has Got
(Bloomberg) -- Money managers love to say past performance is no sure-guide to the future, but there are plenty who’d argue it’s better than no guidance at all.
Likewise, Wall Street is rushing to project the fallout from the coronavirus by drawing on the history of the SARS outbreak in 2003 -- in full knowledge that the past is no prologue.
Dramatic changes in China’s economy, its cross-border linkages and the very structure of global markets undermines their go-to historic template.
“The market context at the time of the SARS epidemic could not be more different than it is currently,” Societe Generale SA strategists including Frank Benzimra wrote on Wednesday. “The impact could potentially be deeper and wider due to China’s economic rise over the past 17 years and the very different risk environment this time around.”
For one, China’s economy is almost 10 times larger than in 2003, making it a much bigger systemic threat to the global financial system. At the same time, it has evolved to become more services-led, with major implications for how the virus scare is transmitted into markets.
This is all before considering the accessibility of Chinese markets and usage of the yuan, both of which are notably higher than in 2003. The country is far more open with millions of middle-class Chinese travelers going abroad every year, creating new risks.
“Contrary to 2003, when Chinese tourism was mainly inbound-oriented, Chinese tourists have become a significant driver of global tourism,” Chris Turner, global head of currency strategy at ING Bank NV and colleagues, wrote in a note. “Consequently, the speed of the virus spreading could be faster than in 2003, while at the same time the negative impact on global growth could also be higher than in 2003.”
Other major issues of using SARS as any kind of benchmark are historical. First, the nature of media and of the coverage was different. SARS started in November 2002, but it didn’t immediately acquire its moniker and the virus took time to reach widespread public attention.
The impact of the 2003 outbreak was also muddied by another macro headwind: Days after the first Bloomberg article citing “SARS,” the U.S. and its allies invaded Iraq. Subsequent global market reaction to the virus is therefore impossible to separate from the response to turmoil in the Middle East.
Still, the SARS virus remains “a go-to template, as there are more similarities than differences,” according to the team at ING. The bank sees pressure on commodities and commodity-linked currencies, global interest rates set lower for longer, and emerging-market nations with heavy exposure to China or weak economies vulnerable.
The immediate market panic that greeted the outbreak of the virus appears to be receding for now. U.S. stocks posted the biggest jump since October on Tuesday and futures point to another gain on Wednesday. At Citigroup Global Markets, analysts including Pierre Lau said last week equity declines in Asia will be contained because of the lower fatality rate of the coronavirus versus the respiratory illness of the early 2000s.
For some analysts, the advanced stage of the business cycle amps up the risk. SARS occurred at the start of a global economic upswing, but the coronavirus has arrived after a lengthy expansion. Many assets look pricey, which could exacerbate any sell-off as investors rush to lock-in gains and protect pumped-up portfolios. The S&P 500 gained 29% last year; in 2002 it fell 23%.
“While the coronavirus thus far appears less deadly than SARS, risk to markets is elevated given stretched valuations,” Morgan Stanley Wealth Management strategists including Scott Helfstein wrote this week. “Investors may opportunistically take profits.”
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