Financial markets have taken the coronavirus outbreak in their stride for the moment, but there could be deeper consequences if it spreads further and a bigger knock-on effect takes hold.
The virus originated in the city of Wuhan, the capital and largest city in China’s Hubei province also nicknamed the country’s ‘Optics Valley’ due to the concentration of high-tech manufacturing firms. Beijing has put the city of 11 million in lockdown in a bid to restrict the spread.
“The immediate impact would be on the consumption of goods and services and travel-related industries and everything related to hospitality in China. Hong Kong, Singapore and Thailand, which depend on Chinese spending on retail and tourism, will also be vulnerable,” said Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis.
These additional headwinds come at a time when the region is recovering from a bruising trade war which has cut economic growth and impacted investment flows.
Parallels are being drawn with the SARS outbreak in 2003 when more than 8,000 people were infected, just under 800 deaths were reported and as much as US$50 billion losses were reported from reduced economic activity.
Largest human migration
The outbreak comes ahead of the week-long New Year holiday starting on Friday, which involves the largest human migration on the planet with three billion trips expected to be made.
The outbreak of the virus has made authorities more vigilant about the mass movement and forced many Chinese people to reconsider their plans to travel to their hometowns, particularly trips to or through Wuhan.
“We think that global growth was roughly 1ppt weaker in Q2 2003 than it would have been without the SARs effect. But it then rebounded to a pace around 3ppts stronger than that before the SARS outbreak, so the loss was more than recovered,” said Capital Economics analysts in a report which estimated a modest economic impact from the outbreak.
“We do not expect the coronavirus to have more than a temporary effect on global GDP, which is likely to be made up once the disease is brought under control. And while there have already been some effects on financial markets, most notably Chinese equity prices, we suspect that these too will be short-lived,” they said in a note.
Thai tourism, Hong Kong’s retail trade and Macau’s casinos are sectors expected to feel the heat from the outbreak, although the extent of the damage is hard to gauge.
In the currency market, the Singapore dollar and the Thai baht are most likely to suffer if the infection spreads, Nomura analysts say.
Bonds from the China property sector softened, tourism-related stocks were weak and China government bonds rallied.
“Government bond yields have fallen for four straight sessions on fears the rapidly spreading coronavirus would derail the economic recovery, said DBS strategist Nathan Chow. “Ten-year sovereign yield on Wednesday fell 2bps to 3.028%, a level last seen in August when the economy showed signs of slowing amid heightened trade tensions with the US. This could also be attributed to PBOC’s liquidity injection.”
There were winners too – the healthcare sector outperformed the Hong Kong market. In the past month, the sector has gained 6.2%, while the broad market has remained flat.
Jiangsu Sihuan Bioengineering, Shandong Lukang Pharmaceutical and Shenzhen Neptunus Bioengineering saw their stocks surge by about 10%. Face mask firms Tianjin Teda and Shanghai Dragon also soared by about 10%.
“Beijing will need to stimulate the economy in a big way if they are to achieve the rejuvenation dream of doubling the per capita income,” said Natixis’s Garcia-Herrero. “While some people are drawing comfort from the aggressive actions of Beijing after the virus outbreak, one can argue that perhaps the situation is worse than meets the eye.
“The fact that they did not wait until the lunar new year holiday was over, shows the gravity of the situation.”
ANZ analysts said the government’s fiscal and monetary policy remained supportive to growth, providing a buffer to offset any economic impact from this event with the central bank conducting a 240.5 billion yuan of targeted MLF at 3.15% during the day.
“The central bank will maintain a stable environment for the money markets, even after the Lunar New Year holidays. We believe the central government will offer some targeted policy support to Hubei province in the near term,” Raymond Yeung, ANZ’s Chief Economist China, said.
He said that following the SARS epidemic experience, countries are expected to better manage the coronavirus outbreak and the resultant impact would be less severe than SARS.
“In the positive scenario where new infections are limited and there is no significant rise in the mortality rate after the Lunar New Year, we would expect the market focus to increasingly shift back to the main themes of green shoots of a recovery, the semiconductor cycle bottoming and the possibility of a mini US-China trade deal,” Nomura analysts said in a report.