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Where next for markets after coronavirus prompts sell-off?

Sell now, ask questions later.

That appears to be the approach investors are taking as they assess the economic impact of the coronavirus outbreak in China and beyond.

Equity markets everywhere have sold off.

China and Hong Kong are currently closed for the Lunar New Year holiday, but the Nikkei in Japan fell by 2% overnight and European stock indices have all fallen sharply.

All of the main European stock indices are now showing a loss for 2020 as a whole.


The FTSE 100 is the worst affected of the main European indices because of the heavy weighting in it of resources stocks.

For the miners, the likes of Rio Tinto, BHP and Anglo American have been hit hard because Chinese demand is a significant driver of their earnings.

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Shares of the oil and gas companies have likewise fallen because concerns over Chinese demand have sent Brent Crude back below $60 a barrel for the first time since 1 November last year.

On Wall Street, where the S&P 500 index on Friday suffered its worst one-day fall in three months, the major indices opened lower having just suffered their worst week since August last year.

Foreign exchange markets have also seen the concerns over coronavirus dramatically played out.

The Australian dollar and the New Zealand dollar have fallen sharply, reflecting the dependence of Australia and New Zealand on the Chinese economy, as did the Canadian dollar.

Currencies to have benefited include the Swiss franc and the Japanese yen, which are traditionally reached for at times of crisis, as well as the US dollar.

In other asset classes, there has been buying of traditional safe haven assets, most notably US Treasury bonds and gold.

So how bad can it get and where do markets go from here?

One of the big debating points in markets currently is the extent to which there are parallels with the SARS outbreak of 2003, centred on China and Hong Kong, in which 8,000 people were infected and around 700 died.

On that occasion, on an annualised basis, Chinese GDP fell from 12% during the first three months of 2003 to about 3.5% during July, August and September.

Image: Shares in miners such as Rio Tinto have been hit hard

That would suggest that China’s economy, which grew at just 6.1% in 2019, its weakest annual growth in 29 years, could be in for a severe hit, particularly since the coronavirus has struck at a time when millions of people are travelling around the country for new year celebrations.

That case is supported by the fact that China’s economy is more dependent on the services sector, consumer spending and activities like travel and tourism than it was 17 years ago.

Moreover, China’s transport infrastructure has improved immeasurably in that period, particularly high-speed rail travel.

Chinese people have greater access to travel, both inside and outside China, than ever before.

Yet there is also a case for saying things may not be as severe.

Gareth Leather, Asia economist at consultancy Capital Economics, argues that, while in 2003 the authorities in China were initially slow to respond, they have been more open about the spread of the coronavirus and proactive in trying to contain it – as shown by the rapid lockdown of major cities where the virus has been identified.

He said: “The contrast with 2003, when China’s authorities were heavily criticised for trying to conceal the spread of SARS, is marked.”

Ning Zhang, an economist at investment bank UBS in Hong Kong, agreed: “China has learnt lessons from SARS.

“The government is now working much more proactively and transparently to contain the Wuhan pneumonia than SARS, and China’s public health system is now more experienced than before as well.

“Given the limited information, the mortality rate of Wuhan pneumonia seems notably lower than SARS.”

The other reason to be slightly wary of drawing too many comparisons with 2003, when it comes to trying to predict where markets go next, is that circumstances in the global economy and in markets were very different 17 years ago.

In early 2003, the markets were only slowly recovering from the bursting of the dot-com bubble.

Leading stock indices like the S&P 500 and the FTSE 100 had just fallen for three consecutive years, something that was unprecedented for the Footsie and which, in the case of the S&P, had not been seen since the early 1940s.

In 2020, the S&P 500 has suffered only two down years in the last 10 and the Footsie just four, while both indices entered 2020 – as did others – either at or close to their all-time high.

Major economies like the US and the UK have enjoyed a decade of unbroken economic growth.

Many professional investors are, accordingly, haunted by the notion that such economies are closer to the next recession than the last one and that equity markets in particular are due a tumble.

So many have been happy to take profits and sell without thinking too hard about it.

Another big difference between now and early 2003 is that, then, the world was gripped by the build-up to the Iraq War.

Image: Some have drawn parallels with the SARS outbreak in 2003

SARS was merely one of a number of factors on the minds of investors.

It may also be the case that, with Chinese and Hong Kong markets closed, there is no one geography capable of taking a lead and staging a rally on which other markets may build.

The loss of investors from much of the Far East also deprives the markets of liquidity.

It may be that the magnitude of some of the recent falls merely reflect mark-downs in prices rather than actual selling.

And, at some point, there will be a time to buy. When will that be?

Mixo Das, head of Asia equity strategy and quantitative strategy at investment bank JP Morgan in Hong Kong, told clients: “Past experience of market performance around such events suggests that markets tend to bottom with the peak in new cases and news flow.

“Given [those] considerations, it is likely that we have not seen that yet.”

Accordingly, anyone trying to call a “bottom” to the recent sell-offs now may be taking a risk.

Many investors will feel it is too early, in the jargon, to adopt a ‘risk-on’ stance.

Not until the extent to which the coronavirus has spread can be properly established.


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