The spread of the novel coronavirus has gripped markets over the past week as investors attempt to understand the global implications. Thus far the coronavirus has remained relatively well contained within China, though it has spread to other regions over the prior weeks. We believe the recent market selloff is largely justified given the uncertainty around the impact of the coronavirus and China’s importance for global growth. However, we would view a more severe selloff as a buying opportunity considering we do not expect the coronavirus to derail the strength in the longer-term fundamentals of the global economy.
The coronavirus first appeared in December in Wuhan, China, most likely traced to a seafood market in the city. The coronavirus only gained international headlines once it slipped outside the Chinese borders in mid-January as infected individuals travelled outside of Wuhan. Despite the international spread, the overwhelming majority of reported infections have remained contained to China. Despite this current containment, health officials remain cautious due to the apparent long incubation period of the coronavirus and thus its ability to spread from infected individuals showing no current symptoms.
The timing of the coronavirus could not have been worse for China. The Lunar New Year occurred at the end of January, a time historically marked by heavy travel and high personal consumption. Despite travel curbs from the Chinese government, the increased travel within the country threatens to spread the coronavirus more quickly. From an economic standpoint, fears of the coronavirus kept many people indoors and away from restaurants and shops that typically benefit from the holiday. As a result, we expect Chinese growth to slow considerably in the near-term.
From a global standpoint, pre-virus IMF projections had assumed that China would account for about 29% of global growth in 2020. Given the economic implications of the coronavirus in China we would expect economists to decrease their 2020 expectations for global growth over the coming months. Assuming the virus can remain relatively contained, we would view this as only a short-term blip in an otherwise healthy world economy.
Though we view the impact of the coronavirus as largely transitory, we still believe there is reason for caution. While many market participants are utilizing the SARS epidemic of 2002 and 2003 to gauge the impact of the coronavirus, we are a bit wary of this comparison since China’s share of world GDP has increased from 8% to nearly 20% since SARS. Until we gain more information about the spread of the coronavirus we think it makes sense to maintain our cautious view on international markets. We continue to prefer the US equity market as it remains less vulnerable to the spread of the coronavirus and US growth should experience a lower impact.