The Ugly First
The global equity markets have seen a sharp sell off in the last couple of weeks, largely due to the coronavirus out of China. There is no denying that this virus is drawing a lot of attention. Pandemics are very frightening. If you would like to scare yourself, go to the “Explained” series on Netflix and watch the episode on Pandemics. Very awakening.
The stats are these. There have been several epidemics if not pandemics in the near past.
According to the Centers for Disease Control and Prevention (CDC), “Up to 42.9 million people got sick in the U.S. alone during the 2018-2019 flu season, 647,000 people were hospitalized and 61,200 died.”
That seems to be typical of any given flu season, and well below the CDC's 2017-2018 estimates of 48.8 million illnesses, 959,000 hospitalizations and 79,400 deaths. As of the day of writing, in the U.S. there are only eleven active cases of coronavirus; Canada has 4.
Albeit, these are influenza cases and not a full pandemic but on a relative scale it shows how an average endemic compares to the size and scope of the coronavirus.
On an economic front, the current virus could have some pretty serious implications. Most importantly, China is now pretty much under quarantine. It is the second largest economy in the world and produces 1/5th or 20% of the worlds manufacturing output. China’s GDP is 6.0% compared to our own 2%. The current prediction is that their 6.0% GDP could go to 2.0% in the short term as a result of the quarantines. This will have deep impact internationally on companies that rely on China for parts.
An example would be the big three automakers in the U.S., General Motors, Ford, and Chrysler, as well as tech Giants like Apple and Amazon. This at worst could trigger a global equity sell off but even if that were to happen we believe that it would be a temporary impairment in the global economy rather than permanent.
The Good – Best for last
As always, the glass is half full. This latest pandemic will likely take some time to run its course, hopefully measured in terms of weeks and not months. During that time, we may see some added fear-driven volatility. To date we have not really seen that. The VIX, for example, which is the usual measure of volatility and often called the fear index is at a pretty tame level of 15. 25 is the level at which the markets would appear to be threatened.
We do however consistently get asked if this a dip and therefore a good buying opportunity. Our answer: We think yes…but not yet.
There are lots of issues that could create impactful negative Black Swan events. In our view, the coronavirus is not one of them. Have a look at previous market reactions to health-related events.
Source: Dow Jones Market Data
The world will survive. We believe that while we may see some temporary volatility, markets will recover. It’s only a question of when, not if. In the meantime, we will try to stay focused on the current economic fundamentals which still seem to remain neutral to positive.