By Kajanga Kulatunga, Senior Manager, Strategy and Capability, QInvest
The novel coronavirus outbreak, which erupted in China in early January 2020 has forced many assumptions about global interconnectedness to be tested.
The markets nosedived on concerns about the impact on global economic growth and company profitability, however we think the real damage will be to accelerate trends towards deglobalisation.
If nothing else, the outbreak and eventual shutdown of parts of China highlighted to the world how all roads eventually run to, or through, China.
China is Australia’s largest trading partner so we will take a short-term hit. But long-term prospects for most asset classes will depend more on the overall global economic backdrop, notably the direction of interest rates.
The coronavirus outbreak that began in Wuhan, the sprawling capital of Hubei province in central China, took the world by surprise, and for the first time in decades led to the complete shutdown of some of the most populous cities in the world. By early February, the World Health Organisation reported more than 45,000 cases of coronavirus had been confirmed and more than 1100 deaths.1
The psychological damage stemming from the shutdown will remain long in memory compared to the economic and investment consequences in your portfolio.
While the medical jury is still out on the potency of the virus, a closer look at the major zoonotic virus outbreaks over the past 25 years allows for some optimism that once a peak is reached in the virus spreading, fatalities may also fall exponentially. Zoonotic diseases are those that have the ability to pass between animals and people.2
Source: The Lancet, https://doi.org/10.1016/S0140-6736(20)30350-0, accessed 13 February, 2020
SARS: Severe acute respiratory syndrome
MERS: Middle East respiratory syndrome
hCoV-EMC: Human coronavirus Erasmus Medical Center
2019-nCoV: 2019 novel coronavirus
HARS-CoV: Han acute respiratory syndrome coronavirus
* For 2019-nCoV, data is at 9 February, 2020
** Although the 2014 Ebola outbreak was believed to have started with a direct bat-to-human transmission, non-human primates have been indicated in previous Ebola outbreaks.3
The extensive efforts to contain the coronavirus in China will have significant implications for Australia in the near term. Admittedly, the outbreak of SARS in 2003 did not have a large impact on the Australian economy. But Australia’s links with China have grown enormously since 2003. The share of Australian goods exported to China has risen from 8% in 2003 to 38% in 2019.4
Education and travel, where China accounts for over 50% and 15% of the market respectively, will bear a brunt of the immediate impact.
Undoubtedly the economic news as a consequence of coronavirus will be impacted over the next few quarters, but don’t let it distract you from the fundamentals for both the global economy and financial assets, which continue to get buoyed by low interest rates.
This outbreak may lead some manufacturers very dependent on China to start diversifying their supply chain, potentially escalating the trend to deglobalise. However, China’s loss may well be other countries’ gain.
We simply don’t know how far, or fast, the novel coronavirus outbreak will ultimately spread, so for the time being we are assuming that the response across asset classes will follow the same pattern observed during and after previous epidemics – that the initial panic will be unwound after a few weeks or months.