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How Serious Could The Coronavirus Correction Get As Markets Slide?

by Jonathan Adams
Coronavirus

As markets slide on concerns over the potential economic impact of the coronavirus outbreak in China, many of those investing online will be mulling over whether it’s an opportunity to ‘buy the dip’. Or should we be concerned things could get significantly worse and the drop in global markets over the last several days deepen?

The coronavirus outbreak in China is having a significant impact on domestic consumption over the lunar new year period of traditional spending. It is and will continue to prevent tens of millions of people from travelling. That includes Chinese professionals and tourists as well as internationals who travel to the world’s second largest economy for business.

Global equities markets closed sharply lower yesterday and the Brent crude oil price also dropped below $60 a barrel for the first time since October. It has now lost over $7 in a week. East Asian stock markets have suffered the heaviest falls, though those in China itself, and Hong Kong, are closed until next week due to the lunar new year holiday. But the impact could be seen in funds and ETFs with exposure to China, as well as international companies for whom the Chinese market is important. The offshore yuan dropped to its lowest level of the year.

Wall Street indices, also under pressure from the receding prospect of the Fed bringing forward an expected interest rate cut, dropped to their lowest intra-trading level in almost four months. Fed officials today start a two-day meeting to decide on any change to interest rates and almost 90% of analysts are forecasting the decision will come down against an immediate rise.

The S&P 500 did recover some of its intraday losses to close yesterday to a more modest 1.6% loss. It is now 2.6% down from its record closing level, set 10 days ago. The Dow Jones industrial average also slid by 1.6% and the tech-heavy Nasdaq was the worst effected of the major Wall Street indices – down 1.9%. The ‘fear gauge’ of the CBOE Volatility Index was up 20.2%, to its highest reading since October.

In Europe, the LSE’s FTSE 100 fell to a 2.3% loss yesterday, erasing the gains achieved since December’s general election put a spring back into the step of UK markets. Stocks that saw the biggest losses were those in the travel and tourism sector and luxury goods. Intercontinental Hotels fell 4% and British Airways owner IAG 5.1%.

Germany’s Dax lost 2.7% France’s CAC 40 2.7% and the pan-European Stoxx 600 finished 2.3% down on Friday’s close.

The question for investors is what comes next? Citigroup’s chief equity strategist Tobias Levkovich points out that previous pandemics to have emerged over the past 20 years have seen the S&P 500 lose between 6% and 13%, suggesting there could be some way to go before the current markets slump runs out of steam:

“The Sars scare in Hong Kong in 2003 changed the mindset of fund managers who had not dealt with such a health risk. Now the coronavirus has created deep concern, with still-limited information on the extent of contagion and what remedies can be put in place.”

There are already confirmed cases of coronavirus infection in the USA and 2774 cases confirmed worldwide, mainly in China and concentrated around the city of Wuhan, where the outbreak started. At least 80 deaths have resulted from the virus. Scientists believe the real number of infections worldwide is likely to be closer to 100,000.

At this stage, with it very difficult to know how quickly the outbreak will be contained. The Chinese authorities have taken the unprecedented step of quarantining the entire city of Wuhan, which has a population of over 11 million.

How quickly a vaccine for this particular new strain of coronavirus might be available is hard to tell but almost certainly within a year. That could mean a rough few months while officials and medical experts struggle to get the outbreak under control. But predictions on how bad things could get, or not, is largely speculation at this point in time.

Most analysts expect that the most likely scenario is that the medium term impact on investment markets will be confined to sectors where the economic impact of attempts to control the outbreak will be most keenly felt. Those include securities with significant exposure to China’s economy and the travel sector. JP Morgan analyst Bruce Kasman expects “a regional rather than global shock”, to financial markets.

Investors with a long term outlook should probably do little to respond to current coronavirus-induced volatility. It’s not impossible that it sparks a wider ranging correction but the more likely scenario is a period of downwards pressure on markets before a bounce back outside of east Asia. China and the surrounding region would be expected to be effected for longer than the rest of the world. There will be investors buying this dip in the belief that unless the outbreak turns particularly serious, markets will recover relatively quickly.

Important
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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