Coronavirus: Short & Long-Term Impacts

Madison is closely monitoring the coronavirus outbreak, and our hearts go out to those affected.  From an investment perspective, our opinion of the likely outcome depends on the severity and length of the epidemic, two current unknowns.  However, we can look back at another epidemic (SARS in 2003) to help gauge potential outcomes of events as they unfold. We are hopeful that over the long term this crisis will be just another in a long series of challenges that the markets will overcome. Franklin Templeton recently put out their opinion on the virus’s economic impact, which we share here:

Economic Impact of the Coronavirus

Short Term – Negative

“We think the current events will have a negative impact on sentiment as well as the economy in the short term. In China and Asia, near-term business activity and consumption will likely be significantly impacted as people curtail their movements as a preventive measure. This could result in a materially negative growth print. Our teams on the ground report that people in China have been canceling travel plans, social interactions and outings, leaving restaurants, cinema theaters and hotels empty. There is much-reduced traffic in the transport hubs that are still in operation.

Consumption is a meaningfully more important contributor to the economy than it was in 2003 at the time of the SARS episode, and now accounts for over 70% of China’s gross domestic product (GDP) growth (versus less than 40% in 2003). This leads us to believe the drag on the economy may be more severe in magnitude than what we saw in 2003. However, a recovery may not be as speedy, as China’s economy is now not only much larger in size but also growing at a more modest rate than the double-digit rate experienced 14 years ago.

Sectors such as travel, leisure, retail and select sub-segments of discretionary consumption will likely be directly impacted in the near term. As China has become an integral part of the global supply chain, any further extension of factory closures would raise risks related to temporary supply chain disruptions for multinational companies.

As we believe China’s economic growth will likely be affected for at least one or two quarters, the government may respond to a slowdown in the economy through stimulus measures such as interest rate cuts, or measures to encourage infrastructure spending and/or boost consumption. In the very near term though, the government’s efforts will likely remain focused on containing the spread of the virus.

Medium to Long Term – Neutral

While we monitor the situation, we currently believe the long-term growth outlook for China and Chinese equities remains unchanged. The mass adoption of technology, rising consumption and premiumization (rising consumer demand for premium goods), manufacturing upgrades and government reforms should help the country emerge from this challenging period stronger and more self-reliant, with multiple pillars of economic support.

Likewise, we remain sanguine about the prospects for Asian equities in the long run, with a focus on quality names with sustainable earnings power.

  • We would note that the market correction during the SARS outbreak was relatively short-lived. Markets had even gained between the start of the epidemic (when the WHO was notified) to the end of the SARS episode in July 2003. We would, however, caveat this by noting that in contrast to the current situation, the SARS episode followed a period of equity market downturn, which troughed in late 2002 (S&P 500 Index)-early 2003 (MSCI ACWI) before a multi-year recovery.

SARS Outbreak in 2003

Equity Markets in Asia, Hong Kong & China fell -6%, -8% & -14% from start of epidemic to trough but recovered within a few months.

Sources: FactSet, MSCI. MSCI AC Asia ex-Japan recovered to its peak in Dec 2012 in June 2003 which MSCI China surpassed its previous peak in Jan 2003 in May 2003. As of 27 January 2020. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com.

Coronavirus Outbreak in 2019

Equity Markets in Asia, Hong Kong & China fell -4%, -5% & -6% from January 2020 high to current.

Sources: MSCI, FactSet, as of January 27, 2020. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com.

In sum, the situation remains fluid and is expected to worsen in the near term. The rapid development of the 2019 coronavirus has brought some uncertainty to the near-term global growth outlook. However, in our current assessment, downside risks are biased toward the short term, while our long-term market and economic outlook remains intact.”

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. The opinions expressed herein are those of the named advisors at the time written.  Actual economic or market events may turn out differently than as presented.  Emphasis by Madison. © 2020 Madison Wealth Management