Coronavirus: Looking at the Impact to Your Portfolio
With China’s coronavirus outbreak dominating headlines, we have received questions from clients about what the virus means for the financial markets and client portfolios. Below is commentary from our Portfolio Advisory Group discussing potential economic and market implications.
Background: A newly identified pathogen, Wuhan Coronavirus (2019-nCoV), is spreading throughout Asia-Pac, Europe, and North America. Compared to SARS in 2003, this coronavirus seems to be more contagious, though less fatal, in these early days. Fortunately, the convergence of DNA sequencing, machine learning, and gene editing may make these pathogens easier to control. Unlike in 2002-03 when China suppressed information about SARS for three to four months, Chinese researchers sequenced 2019-nCoV within days of the outbreak, yielding key insights into the transmission and prevention of the disease. Thus far, 2019-nCoV has killed 80, or nearly 3%, of the roughly 2,800 cases identified, compared to the 9-10% fatality rate in the roughly 8,000 SARS cases identified in 2003.
SARS experiences suggest economic fallout in China will be material but transitory (see chart below).
What about the Canadian economy? CIBC Economics team observed that the SARS outbreak “lead to a spike in illness, quarantines, and a visible bite out of GDP” in the peak months in parts of Canada. “But in contrast, the Asian bird flu never delivered the global economic punch that some were forecasting at the time, including a prominent Canadian economist who predicted a global recession. Tens of thousands of Canadians fall ill to influenza A or B each year, causing roughly 1,000 deaths, without creating noise in financial markets.”
“Globally, even if this does play out like SARS, and there’s a broader contagion, an effective response by public health authorities, who this time are already armed with an identified and testable virus, would” help to assuage impact on the economy and markets. “When Canada was disproportionately hit with SARS, GDP fell in both March and April and its airline stocks clearly underperformed their U.S. counterparts (see chart below).”
JPM opined that the “Wuhan lockdown and regional travel restrictions should hit Asian activity data, but the magnitude and duration of that shock are impossible to forecast when there is no clarity on how long restrictions must persist to contain the outbreak.” Nevertheless, JPM added “although these recurring outbreaks are alarming, there appears to be no ominous message about public health issues as black swans for markets. As shown in the chart below, which traces the number of deaths globally from epidemics over the past century, such episodes flare every few years but are fleeting. Mortality from epidemics has been declining for two decades, despite the succession of SARS (2003), H1N1/swine flu (2009), Ebola (2014) and MERS (2015). The same factor that tends to contain these events – an international public health response ranging from screening treatment to quarantine to lockdown – has also made them acute but localized economic and market events. It will be impossible to eliminate these episodes due to disparities in the quality of healthcare within and across countries, the aggravating factor of population density and disease mutations. But the more frequently that policy responses contain epidemics, the less each subsequent outbreak should move markets.”
How the stock market has performed during past viral outbreaks? The following exhibits from a MarketWatch article help provide context around equity market’s performance during past infectious disease outbreaks.
Bottom line: Using past infectious disease episodes as a guide, the economic and market impacts stemming from the latest Coronavirus outbreak are likely to be material but ultimately fleeting. Compared to the 2003 SARS outbreak, Chinese authorities appear better prepared to deal with public health crises, underscored by improved transparency and pre-emptive measures to restrict travel. While the prevailing period of heightened anxiety and risk aversion will eventually fade, investors should brace for further volatility and downside in the near term given the number of new infections remains on an uptrend. During past viral outbreaks, the inflection point for market sentiment typically arrives when the number of new cases has peaked.
If you have any questions or would like to discuss this further, please feel free to give me a call at 416-974-4059.
Samuel Gorenstein, MBA | Gorenstein Wealth Management Group | Vice President & Associate Portfolio Manager | Yonge & Eglinton
RBC Wealth Management | RBC Dominion Securities Inc. | T. 416-974-4059 | F. 416-974-0332
2345 Yonge Street, Suite 1000, Toronto, Ontario M4P 2E5