Monday, 27 January 2020

How badly will China virus outbreak hit markets?

The coronavirus outbreak in China continued to spread over the weekend, with 2,051 cases of infection confirmed as of 26 January and the death toll at 56.

“According to recent clinical information, the virus' ability to spread seems to be getting somewhat stronger,” said China's National Health Commission Minister Ma Xiaowei.

While the S&P 500 fell 1 percent last week amid concerns over the outbreak, Mark DeCambre at MarketWatch noted that past outbreaks have not caused extensive losses in global stock markets.

DeCambre said that based on data from Charles Schwab, the MSCI All Countries World Index gained an average of 0.4 percent in the month after an epidemic, 3.1 percent in the ensuing six months and 8.5 percent a year later.

However, other analysts expect a more substantial impact on Asian markets, based on experience during the SARS outbreak in 2003/

Morgan Stanley analysts said the MSCI Hong Kong and Korea indices underperformed by 10 percent and 11 percent respectively as SARS escalated.

“The lesson from SARS suggests that the turning point for sentiment will come only after the number of new infections starts falling,” said Larry Hu, head of China economics at Macquarie Capital.

Some analysts say a significant impact on the US market cannot be ruled out.

“In a stock market where the dominant factor is price momentum, the impact of a change occurring in an external risk vector or a natural risk phenomenon is intensified,” said David Kotok, chairman and CIO at money manager Cumberland Advisors.

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