Short-term economic fallout from virus looks substantial
As we highlighted last week, all bullish bets are off as 2019-nCoV virus had the potential to be a Black Swan event and we advised investors to raise cash in the near term until we get to the bottom of how serious the contagion is with a time-line which we set to be around mid-Feb. We felt then and still do now that no other aspect of the market is of any importance until fears of the contagion subside. As we also noted in our last week’s publication, the virus had already looked to be far more contagious than SARS and we felt fears gripping the world could lead to a much bigger economic fallout which stock prices had yet to price in.
This is now becoming more evident as China’s consumption is clearly plunging, many global airlines are halting flights to and from China and many large multinationals corporations have temporarily ceased their operations in the region. With this backdrop, the negative impact on earnings for this quarter will indeed be very severe, leaving the current earnings season somewhat irrelevant, especially as most corporations have yet to fully factor in the ongoing events that look highly likely to provide more drag than their guidance seem to indicate.
Some economists suggest that drop in China’s consumption will be in double-digits, looking to cut GDP growth by more than 1%. Given that most provinces have extended the lunar holidays by another week to keep migration to a minimum to try to contain the spread, these assumptions look increasingly realistic. With China’s important tourism to Japan grinding to halt as flights are cancelled and visitors are finding themselves increasingly unwelcome (and this is happening across the world), Japan’s growth in economic output is also predicted to decline by as much as 0.5% this quarter.
Now for the good news..
Although the contagion has spread fast and beyond China’s borders and indeed we are hearing of the first death outside of the country (in Philippines) which could further raise alarm bells, the evidence thus far seem to indicate that the virus in its current form has a far lower official reported fatality rate than SARS or indeed other forms of Coronaviruses. However, we think the unofficial numbers should leave this death rate ratio even far lower than its officially reported 2% level.
Given that the symptoms of 2019-nCoV are mostly very mild and hard to detect, some even after initially being tested, we think it is safe to assume number of cases are already in their hundreds of thousands and not less than 15,000 recognised thus far which are mostly in China. This is especially given that it has also proven to be highly contagious even during its incubation period and is now suspected of being transmitted not only through breathing the airborne form but through ingestion of contaminated food.
With the official death tall said to be around just over 300 by 1st of February, it is also safe to assume that number of deaths not diagnosed from the disease are also higher. However, the number of these undiagnosed fatalities cannot possibly be anywhere on that same scale of those who have contracted it but are yet to be in the tally. So assuming that the cases of those who have contracted the virus is around ten times higher while number of official deaths to be closer to 2.5 times or around 1000, the fatality ratio looks to be notably below 1%, leaving this virus as potentially one of the most milder pandemics we have seen in years.
Mid-Feb could be the bottom of the market
Obviously, if the virus does mutate to a more potent form which could raises its kill rate, the likely outcome could be dramatically different and the direction of stocks will be the least of our worries. However, given what we know thus far, we think it is safe to assume that stock markets would have discounted much of this contagion by our original time-line, somewhere around middle of this month as 2019-nCoV becomes another known pathogen that has entered our echo system and we simply have to live with it.
This scenario is likely to bring huge buying opportunities in the coming weeks. However, we are not there yet and regulatory moves worldwide to contain the virus will have their own negative impact on economic growth and corporate earnings. Meanwhile, we have yet to see the virus being notably spread outside of China which if and when it does, it could lead to more short-term panic selling. But come what may, as long as the fatality rates remain as low as what we suspect, we think stock markets look highly likely to discount the negative impact of this event soon enough as life goes on.