The financial markets have finally taken the measure of the economic impact of the Wuhan coronavirus and its potential to disrupt China and the world economy.
As we always argued, any external event in the current speculative environment had the potential to send equity markets sharply lower and the outbreak of the virus in Hubai in the middle of January led global equity markets to make a clear top on January 24, 2020.
In the past few days, the markets tried to rebound but the fast-spreading disease has now become a serious cause of concern and equity markets are tanking today.
As each new day brings updates on the spread of a new coronavirus from China, it is important to consider how the dispersal of the illness will play out in terms of its economic impact and its threat to public health.
The 2019-nCoV Virus
The 2019-nCoV coronavirus informally known as the Wuhan coronavirus is a contagious virus that causes respiratory infection and has shown evidence of human-to-human transmission, first identified by authorities in Wuhan, Hubei province inChina.
The initial cases had epidemiological links to a large seafood and animal market in Wuhan and the virus is thought to have a zoonotic origin, though this has not been confirmed.
Comparisons of genetic sequences between this virus and other existing virus samples have shown similarities to SARS-CoV (79.5%) and bat coronaviruses (96%),[with a likely origin in bats
Initial reports link the first case to have been caused by a transmissi0n form a snake to a human being, but later and more documented analyses show that the virus may be contaminating directly even before the appearance of any symptoms, meaning that determining the precise origin of the outbreak is made very complicated.
The new coronavirus was first identified in Wuhan, the capital of China’s Hubei province, after people developed pneumonia without a clear cause and for which existing vaccines or treatments were not effective.
The virus has shown evidence of human-to-human transmission, and its transmission rate (rate of infection( appeared to escalate in mid-January 2020, with several countries across Europe, North America and the Asia Pacific reporting cases very quickly.
The incubation period (time from exposure to the development of symptoms) of the virus is between two and ten days and it remains to be officially confirmed if it is contagious during this time but anecdotal reports point to this conclusion.
Symptoms include fever, coughing, and breathing difficulties. The Virus can be fatal but the death rate, for now, is less than the one of SARS at 2.96 %
How did it originally spread?
As of 30 January 2020, approximately 7920 cases have been confirmed, including in every province of China.
The first confirmed death from the coronavirus infection occurred on 9 January and since then 170 deaths have been confirmed.
Epidemiological studies estimate that a larger number of people may have been infected, but not detected.
The first local transmission of the virus outside China occurred in Vietnam from a father to his son,[whereas the first local transmission not involving family occurred in Bavaria, Germany on 22 January when a Bavarian man contracted the disease from a Chinese business visitor at a meeting in Germany.
In response, cities with a combined population of over 57 million people including Wuhan and 15 cities in the surrounding Hubei province were placed on full or partial lockdown, involving the termination of all urban public transport and outward transport by train, air and long-distance buses.
Chinese New Year celebrations and tourist attractions have been closed over the fear of transmission, including the Forbidden City in Beijing.
Hong Kong also raised its infectious disease response level to the highest level and declared an emergency, closed its schools until mid-February and canceled its New Year celebrations. It has now closed all borders with mainland China as did Russia and Mongolia
A number of countries have put out travel advisories warning against travel to Wuhan or even canceled direct flights to Hubei province.
Most Western countries have now organized the repatriation of their citizens living in Hubei province and travelers who have visited Mainland China have been asked to monitor their health for at least two weeks.
Where do we stand now?
At the time of writing, the number of infected people has risen to 7’700 and the number of death has exceeded 170, all located in China for now.
The following chart was put out on January 28th. In only two days the number of confirmed cases has almost doubled.
The following are assessments of a best-case scenario, in which the response curbs the impact; a worst-case scenario, in which the infection rate continues and the death rate rises; and a most likely scenario, in which latency leads to a global pandemic, but the death rate remains low.
This is a crisis that will likely be measured in months instead of weeks. The severity of travel restrictions so far means that losses in the billions of dollars should be expected in China, Asia and the rest of the world — in that order.
At this point, its effects on public health remain relatively low — the common flu has killed far more people in the United States this season than the new virus has globally.
However, the uncertainties around this new illness mean that authorities are assuming the worst until they can determine its true severity. Developments over the next two weeks will likely provide the information necessary to determine which scenario will be most likely.
Best Case Scenario: Timely Response Curbs Impact
Assuming that the spread of the new virus follows patterns similar to those seen with severe acute respiratory syndrome (SARS) and the Middle East respiratory syndrome (MERS), the early and aggressive response from Chinese and global health authorities will curb the effects of the new disease on global public health.
Despite the quick reaction to the coronavirus, designated nCoV2019, the number of confirmed cases will continue to rise over the next two weeks, but then the infection rate will start to level off in mid-February.
Chinese authorities and foreign governments will start to lift some of their restrictions, and the virus will be contained by the end of March — a little faster than the timeline for SARS in 2003.
However, China’s internal and external travel restrictions already guarantee a significant economic impact on it and the countries that rely on Chinese tourism.
Chinese Consumption is bound to be severely affected, but consumption in other countries could also be affected as people avoid going to malls, travel using mass transit systems or buses and avoid going to public places such as restaurants, cinemas, and theatres.
We assess that this scenario as possible. Though a quick resolution is optimistic, the rapid and drastic response to the virus could correlate to a rapid and drastic reduction in its spread over the coming weeks.
Worst Case Scenario: Infection Rate Continues and Death Rate Rises
The virus has a two-week incubation and is contagious for at least part of that time.
In addition, close to 5 million people left Wuhan, China, before travel was restricted, meaning that tens of thousands of people could be spreading the disease around China and the world.
In this scenario, confirmed infection rates start to spike in mid-February as patients start to show symptoms after the delayed onset of the virus.
The death rate, which had been holding steady at about 3 percent, climbs as health authorities are overwhelmed and cannot treat serious cases that were previously nonlethal. By then, it’s too late.
But to address the problem, Chinese authorities start implementing travel restrictions on major cities, such as Beijing, Shanghai, Guangzhou and Chongqing.
Foreign governments follow suit, implementing blanket bans on travel from China or on an increasing number of regions affected by the outbreak.
Quarantines prolong the disruptions to supply chains and economies for months. The economic cost of the quarantines is compounded by lost productivity and the cost of the massive amount of resources needed to respond to the health crisis.
We assess this scenario as unlikely, because of the high level of awareness about the outbreak and the attention given to the virus around the world.
In addition, diseases tend to be either highly lethal or easily communicable, but rarely both. Based on available information and current modeling, nCoV2019 appears to be more communicable than deadly, ultimately reducing its impact on public health.
Most Likely Case: Latency Leads to Global Pandemic, but Death Rate Remains Low
The up-to-14-day incubation period of the virus means that many unwitting carriers were able to get out of Wuhan and travel abroad before the quarantine began. Airport screenings failed to catch carriers who weren’t showing any symptoms.
In this scenario, international cases rise from the dozens to the thousands over the coming weeks, and the first deaths abroad are reported — mostly among the elderly and people with other health problems.
However, the death rate remains low or falls below 3 percent as medical professionals start to better understand the virus and how to treat it.
The new coronavirus exacerbates an already bad flu season, but the chances of serious illness or death in the general population are quite low.
As was the case with SARS, the economic effects of preventive restrictions prove far more disruptive than the impact of the virus on public health. Like MERS, no cure is found for nCoV2019, but infections taper off through the spring and eventually fade in the summer.
Sporadic cases result in occasional but temporary travel restrictions in China and abroad.
We assess this scenario to be most likely. The apparent ease of person-to-person transmission and rapid spread mean that the virus will be difficult to contain and that it is likely to trigger more disruptions before authorities are able to get it under control.
This is not a crisis that will be resolved overnight, but as restrictions on movement are gradually lifted in the coming months, authorities can prove to a skeptical public that conditions have improved.
What to Watch ?
The Number of cases: The number of confirmed cases has been growing exponentially over the past three days. This is likely to continue for the next week and very likely breach the 10,000 mark very quickly.
Continued acceleration through February and into March will need to be monitored and a declining growth rate will signal that the pandemic is reaching its end.
Geographic spread: Within China, Hubei province continues to account for over half of the total number of cases and is the focus of quarantine efforts. However, all other provinces, except Tibet, are reporting confirmed cases.
The latest data shows that in fact, the most infected region of China is the manufacturing center of Guangdong where workers may have transmitted the virus in a significant way in factories.
New countries are reporting cases of the virus every day. Developed countries, such as Singapore, Germany and the United States, will be better equipped to contain the spread internally, but developing countries, such Cambodia, Myanmar or those in Africa, will likely struggle to contain local outbreaks.
Death rate: This has been between 2 percent and 3 percent for the past week, a lower rate than both SARS and MERS. Developments in the next one-to-two weeks should confirm whether that holds true for nCoV2019. If the death rate climbs above 3 percent and the infection rate also continues to climb, we would be moving more into the worst-case scenario.
Recovery rate: Right now, the number of recovered patients is lower than the number of deaths, but that figure should increase as time passes and more patients are released from the hospital. Eventually, the number of recovered patients should eclipse the number of deaths. That will indicate that things are improving and that the death rate will stay relatively low.
Travel restrictions: The biggest impact comes from national authorities, but many airlines and private companies are restricting travel to China and especially to Hubei province. China itself has placed the most severe restrictions on travel so far, effectively quarantining Hubei province and prohibiting group tours abroad.
Other governments in Asia, as well as the Middle East, are also restricting travel from China. These restrictions will have the biggest, immediate economic impact as the number of Chinese tourists drops around the world and as productivity decreases in Hubei, China’s eighth most important province in terms of GDP and in Guangdong.
If infection rates and death rates climb through February, Chinese authorities will impose more restrictions, as will foreign governments, making travel to, through and from China exceedingly difficult.
To us, the most important variable to watch is the Recovery Rate which has been extremely low until now.
Unusually, the recovery rate has followed neither the contagion rate nor the death rate.
This may be due to the length of the virus cycle, but it may also be due to a situation where the virus is difficult to cure even if it is no longer lethal. In this instance, infected patients may be obliged to stay in hospitals for days and even weeks making medical costs surge with a significant impact on insurance and pharmaceutical companies.
By itself, the virus is not enough to cause a major economic disruption unless we really move into our worst-case scenario.
China is bound to feel the biggest impact and it is already assumed that the economic cost could match the one of SARS in 2003 or a 2 % loss of GDP
During SARS in 2003, the Chinese stock market lost 15 %% before rebounding very sharply at the end of the outbreak.
The current outbreak already took a heavy toll on the Chinese Yuan which fell back above 7.- and on Hong Kong Listed H shares which already lost 10 % in the past week or so.
It is always dangerous to try to catch a falling knife, but we would take this correction as an opportunity to accumulate both the Yuan and Chinese equities in this volatile moment.
On a more global basis, it is extremely difficult to assess the direct impact of the pandemic. However, as we highlighted in OUR SEVEN INVESTMENT CALLS FOR 2020, this could be the straw that could break the secular rally’s back.
Environments of extreme optimism, speculation, concentration and indexing where algorithmic trading amplifies trends only need one unexpected negative event to turn the trend and initiate a phenomenon of liquidation.
What is certain is that the pandemic will have an impact on the global economy in the first quarter of 2020 through less consumption.