Equities under pressure on rising coronavirus fears
The continued spread of the coronavirus that first emerged in Wuhan, China, has further rattled capital markets. Global stocks, particularly emerging market equities, have sold off sharply, while U.S. Treasuries, considered a safe haven in times of crisis, have risen in price and fallen in yield to levels not seen for nearly six months. Investors are increasingly concerned that the transmission of the virus within China and across the globe could have a durable and negative impact on global economic growth and, by extension, hamper corporate profit growth.
Markets under pressure
Due to the economic risks posed by the coronavirus, the uncertainty surrounding its transmission and fatality rate and the near-term economic impact of reduced consumer activity in China, equity prices have been under pressure ever since virus fears first emerged in mid-January.
Since January 17, emerging market equities, as represented by the iShares MSCI Emerging Markets ETF, have fallen more than 9 percent. Importantly, China is that index’s largest country constituent. China and Hong Kong-listed securities together represent one-third of the overall index.
Global growth concerns have also pressured oil and other commodities, due to the expectation of a decline in global travel and factory activity in China, with crude oil falling 12.7 percent. U.S. large-company stocks, as measured by the S&P 500 Index, while not immune to current events, have proven more resilient, and have fallen around 3 percent from their prior highs.
What we know about the virus
As of January 31, according to the Center for Systems Science and Engineering at Johns Hopkins University, there are more than 9,700 confirmed cases of the coronavirus and more than 200 fatalities.
While the virus appears to be spreading within China from its epicenter, Wuhan, at this point the virus has been more contained outside the mainland. Thus far, only 118 coronavirus cases have been confirmed outside China, and governments and global health authorities are attempting to contain the virus to the currently affected areas. The coronavirus’s failure to spread internationally is an extremely positive development, but if this changes that would constitute a considerable risk to global growth.
Risk to the current outlook
The virus is already having an impact on economic activity, with people staying home and spending less. Wuhan, a city more populous than New York, is at a virtual standstill. More than 45 million Chinese people are quarantined and 60 million face travel restrictions. Further, many international airlines have announced flight suspensions to China, reducing tourist traffic and disrupting general commerce.
China’s economy is much more consumer-focused today than it was in 2003, when a similar coronavirus known as severe acute respiratory syndrome (SARS) broke out. Today’s likely consumer spending slowdown may have more than a transitory impact. China is now the world’s second-largest economy and has tight economic links with the rest of Asia. There is a risk a slowdown could reverberate globally.
We observed a multi-speed global recovery as we began 2020, with emerging market economies exhibiting the strongest economic momentum of their global peers. While we continue to see this economic rebound in much of the data and indicators we assess, the data lags current events and doesn’t yet measure the coronavirus outbreak’s full impact. Because of the Chinese Lunar New Year holiday, key Chinese economic indicators covering the recent time period will not be released until March.
We are monitoring the rapidly evolving situation closely and will be certain to update you if it impacts our capital market views. We firmly believe that commitment to a disciplined financial plan can improve investment outcomes and help investors meet their personal goals. As always, we are happy to answer any questions about the situation and its risks to portfolios and we thank you for giving us your trust to manage your hard-earned capital.
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