How markets have responded to the coronavirus
- Explain how markets are affected by global health scares
- Describe the best kind of stock to be invested
- Explain how recoveries work
- Explain how markets are affected by global health scares
- Describe the best kind of stock to be invested
- Explain how recoveries work
With the spread of the COVID-19 virus beyond China in the past few weeks, global markets have dropped swiftly and have now officially entered “correction” territory, defined by a 10 per cent drop from recent peak values.
What’s happened so far?
As of the end of February, The Hang Seng index is off 10%, the FTSE is off 14.3 per cent, and the S&P500 is off 12.7 per cent from their respective recent highs just weeks before.
Declines of 3 per cent should normally happen just once or twice in an entire yearEach of these indices has experienced a rapid drop of about 3 per cent to 4 per cent per day for the several consecutive days.
Declines of 3 per cent should normally happen just once or twice in an entire year but have clustered together as markets around the world react to the news that the virus has spread, with deadly consequences, around the globe.
California has recorded the first known instance of a person contracting the disease without having travelled to an infected area or to have been in direct contact with a person who’s been to an infected area, indicating that the virus can be transmitted “communally” without detection.
This makes containment and monitoring much more difficult.
The US Centers for Disease Control has asked families to prepare for the possibility of “significant disruption to our lives.”
Given how easily this disease can spread prior to the onset of symptoms, experts expect COVID-19 to become a pandemic and for governments to call for self-quarantine to limit the spread of the disease.
Such slowing of the basic function of our economic engine can have a massive impact on markets as companies around the world see disruption to supply chains and productivity.
What can we learn from previous epidemics?
We examined global equity markets in several recent health crises but surprisingly found that all markets were up during each - SARS in April 2003 (+14 per cent), Avian Flu in June 2006 (+8 per cent), Swine Flu in April 2009 (+16 per cent), the Cholera epidemic of November 2010 (+12 per cent), MERS in May 2013 (+14 per cent), Ebola in March 2014 (+3 per cent), and Zika in January 2016 (+13 per cent).
The fact that markets rose in each of these instances suggests that none of the historic health crises was as globally significant as the current situation.
Examining the SARS epidemic of 2003, which also started in China, may not provide much guidance since China’s role in the global economy has materially increased since that time, when it accounted for about 5 per cent of global GDP.
Today China represents almost 20 per cent of the world’s economy.
