Our Views: Coronavirus

CORONAVIRUS—FEBRUARY 2020

The big news story dominating the headlines over the past few weeks is the coronavirus outbreak. Inevitably this outbreak will affect global growth in the short term in two ways: an immediate fall in demand, as people are either quarantined or choose to stay at home; and the closure of shops and factories, resulting in normal consumer spending in those regions being halted. Secondly, problems in global supply chains become apparent as the loss of factory production in China begins to have knock on effects in other countries, as vital components become unavailable and so manufactured goods cannot be finished and sold elsewhere. In theory this loss should mostly prove temporary. The world has seen many natural disasters such as severe floods (New Orleans), tsunamis and earthquakes (Indonesia), nuclear power plant contaminations (Japan) et al and yet it keeps turning; demand recovers very quickly as economic activity and expenditure is usually just postponed or delayed and so boosts the next period.

This does not stop investors poring over every latest update or rumour regarding infection and death rates. However, this second guessing of markets is generally a fruitless exercise. One would be better served by looking at market reactions to previous recent pandemic flu worries. Firstly take the SARS and avian bird flu outbreaks in the early part of this century, and swine flu in 2009 to 2010.  In all of these cases markets were actually higher by double digits 6 months after the initial outbreak.

During the much more serious episodes of the flu virus in 1957/8, which killed an estimated 1.1million people, and 1968 (1million estimated deaths) it is also difficult to discern any serious adverse effect on markets. The S&P 500 Index rose by 24.0% in 1957 and by 2.9% in 1958. The UK equity market fell by 5.8% in 1957, and rose by 40.0% in 1958. 

In early 1968, the Hong Kong influenza pandemic was first detected in Hong Kong and later spread to Europe and the United States (it is estimated to have killed around 34,000 Americans). Deaths from this virus peaked in December 1968 and January 1969. The S&P 500 Index rose by 12.5% in 1968 and by 7.4% in 1969. The UK equity market rose by 57.5% in 1968, and fell by -15.6% in 1969. One can argue that the world is much more interconnected these days, and that therefore it could be different this time. However, one should remember the oft quoted words of the legendary investor Sir John Templeton: The four most expensive words in the English language are ‘this time is different’.