The coronavirus manifests as a pneumonia-like illness resistant to standard treatments. The first case was reported on Dec. 31, 2019, in the city of Wuhan located in the Hubei province in central China. As of Feb. 17, there have been approximately 71,500 confirmed cases worldwide with a death toll approaching 1,800.
The vast majority of those cases (70,500) are in China, with a small number reported elsewhere, including 15 in the United States. To date, the death rate has held steady at around 2% – much lower than SARS (about 11%) and the ebolavirus (about 50%).
On Jan. 30, the World Health Organization (WHO) declared the virus a global health emergency — a designation that enables international coordination of containment efforts. In addition, travel restrictions have been imposed by more than 50 countries in an attempt to limit spread of the illness.
The number of new coronavirus cases appeared to be stabilizing until Feb. 13, when Chinese officials revised the methodology for counting infections. The change added nearly 15,000 confirmed cases to the total in a single day — renewing fears that the scale of the outbreak could be more severe than previously envisioned. Importantly, the increase did not represent a sudden surge in new infections; rather, it was inclusion of cases previously diagnosed through clinical symptoms but without a positive diagnostic test.
Why should U.S. investors care about a viral outbreak largely contained to one country on the other side of the world? The answer lies in the importance of global economic growth, which underpins potential for growth in financial markets.
China is the second-largest economy in the world, and disruption to the Chinese economy can dampen global growth. Many U.S.-based companies are large multinational organizations dependent on China (and other foreign markets) as suppliers of inputs, as well as consumers of products and services.
In addition to the humanitarian toll, the coronavirus will inflict some level of damage to the global economy. It is unclear whether we are closer to the beginning or the end of the outbreak, which makes it difficult to pinpoint how severe the economic impact ultimately will be.
Today, the virus remains concentrated in China, as do first-order economic disruptions resulting from quarantined populations, business and factory closures, and reduced travel and tourism.
If containment efforts are effective and cases are at or near peak levels, then economic disruption also would be largely contained to China with a more limited impact on the rest of the world. Conversely, if cases spike and/or if the virus spreads aggressively outside of China, the economic disruption would expand as more significant global containment efforts would severely dampen travel and trade around the world.
Consensus forecasts for growth in China’s gross domestic product in 2020 started the year at 5.9%, but have fallen to 5.5% year-to-date (among analysts who have published updated forecasts). The expected reduction to full year growth generally assumes more meaningful impact in the first quarter and recovery/normalization in the second or third quarters.
China represents approximately 17% of global GDP so, all else being equal, a 0.25%-0.50% hit to China’s GDP growth could reduce global GDP growth by roughly 0.05%-0.10%. Unfortunately, all else is not equal as the global supply chain and China’s trading partners also will be impacted, albeit to a lesser degree. Consensus estimates for global GDP growth in 2020 have come down approximately 0.15% year-to-date, which seems reasonable, though we acknowledge a wide range of potential outcomes.
We expect the economic impact related to the coronavirus will only be a temporary disruption and financial markets appear to share our view. In late January, global financial markets responded to the outbreak with a flight to safety predicated on risk of the unknowns. The markets were responding and pricing for the un-measurable risk of what could happen if the outbreak is not contained and the fear that a global pandemic could severely limit travel around the world, reduce demand for fuel and disrupt global trade, all of which could impair the economy.
U.S. stocks pulled back 3% and the MSCI China index pulled back nearly 10% temporarily; however, both markets have recovered in February.
Fortunately, it appears investors are increasingly comfortable looking beyond transitory economic headwinds, though the risk of a deteriorating narrative remains. Year-to-date, U.S. stocks are up nearly 5% and the MSCI China index is up just over 1%. Intermediate-to-longer term market implications will depend heavily on how the situation unfolds in coming weeks and months, but we remain cautiously optimistic in our outlook.
Nicholas Juhle is senior vice president and director of research for Greenleaf Trust.