At the beginning of the week, RBC Global Asset Management released a convincing note, explaining why there was still no need to be concerned about the Coronavirus’ impact on the markets. In short, they argued that “While the virus is a real threat and does appear to be spreading quickly, these health scares tend to be transitory. […]. During the SARS episode, Chinese GDP growth briefly swooned by 2% on an annual basis, while Hong Kong suffered a temporary outright decline in output. Within the developed world, Canada was disproportionately impacted; the economy actually shrank during the peak of the epidemic. […] However, all of these economies managed to rebound briskly as soon as SARS was resolved, and none suffered any obvious lasting damage. We expect that this episode will likely follow a similar trajectory, with a palpable hit to China’s economy that proves to be short-lived, in part because China will likely deliver more stimulus, and in part because conditions should almost immediately normalize as soon as the disease abates.”

 

However, the continued news flow from China makes it increasingly likely that the markets will not be left unscathed over the coming weeks.

 

Despite the difficulties of filtering fact from fiction from online news sources (especially when it relates to the ongoing inside a country where the media does not operate freely), I have been able to gather the following:

The CDC believes that symptoms of 2019-nCoV may appear in as few as 2 days or as long as 14 after exposure (https://www.cdc.gov/coronavirus/2019-ncov/about/symptoms.html)

Typically, with most respiratory viruses, people are thought to be most contagious when they are most symptomatic (the sickest). With 2019-nCoV, however, there have been reports external icon of spread from an infected patient with no symptoms to a close contact. - https://www.cdc.gov/coronavirus/2019-ncov/about/transmission.html

Wuhan, the Capital of the Hubei province and the biggest water, land and air transportation hub in inland China, is largely believed to be the epicenter of the disease and has been put on lockdown. Other cities in Hubei have also been put in lockdown and transportation between provinces has been curtailed. https://www.wsj.com/articles/spreading-coronavirus-forces-lockdown-of-another-chinese-city-11579774393

China has extended the Lunar New Year holiday by another week, which will keep two thirds of its economy shut an additional week - https://fortune.com/2020/01/31/china-two-thirds-economy-shut-coronavirus-spread/

The attempt to re-open factories the following week will likely be disrupted due to logistical complications arising from the lockdown of the Wuhan hub and in the supply of migrant workers unable or unwilling to return to work - https://www.forbes.com/sites/willyshih/2020/01/30/wuhan-coronavirus-and-china-manufacturing-this-is-going-to-hurt/#1f026a3455fb

As of today (Sunday the 2nd of February), local officials admit that the situation in Hubei is still “severe and complicated” - https://www.reuters.com/article/china-health-hubei/situation-in-chinas-virus-hit-hubei-province-severe-and-complicated-vice-governor-idUSB9N28F046

China stock, currency and bond markets have all been closed since 23 January. Today (Sunday), China's central bank said it would inject a hefty 1.2 trillion yuan ($173.8 billion) worth of liquidity into the markets in attempt to protect against likely upheaval - https://www.theglobeandmail.com/business/international-business/article-china-to-inject-174-billion-of-liquidity-on-feb-3-as-markets-reopen/

Why you should be concerned:

Although markets recovered swiftly in 2003 following SARS, China contributes a much greater share of global economic activity today (15.8%) than it did compared to 2003 (4.3%). So any temporary economic pain in China could be a greater headwind for global growth.

This outbreak is occurring when market valuations are at historical highs and interest rates at historic lows. High stock valuations can result in large stock market drops if there is a negative change in investor’s earnings expectations. Although Central Banks can help support the economy and stock markets by reducing interest rates, given that interest rates are already low, it is questionable how effective lowering rates further will be.

Being proactive rather than reactive - “You make most of your money in a bear market, you just don’t realize it at the time.” - Shelby Cullom Davis

 

Given the above, there will likely be significant dislocations in the financial markets until the Coronavirus is contained. As a result, we will be making significant changes to our client’s portfolios as this event develops, in order to both protect their wealth and expose them to assets that will benefit from the following phases of the virus’ outbreak:

Phase 1 (where we are today): Economic slowdown and rising global uncertainty

Phase 2: Containment and stabilization

Phase 3: Rebound in economic activity

 

Please feel free to reach out to me to book a complimentary investment portfolio review. During this review, we will be able to analyze how exposed your portfolio is to the growing risks and how we would position it to protect and benefit from the upheaval ahead.