Equity markets across the globe dropped on Monday as concerns around the coronavirus reemerged. New cases were identified in Italy, which has sparked concerns around the ability to contain the virus. As a result, there was a flight to safety in the markets with capital flowing to Treasury bonds, leading to lower rates.
The consensus in the market has been that the coronavirus epidemic would have a similar impact as the SARS outbreak in the early 2000s. While a noteworthy epidemic, it would not have a material impact on the global economy. Over the intermediate term, we subscribe to that expectation. However, it’s becoming clear that coronavirus will have a near-term impact on the Chinese economy, and to lesser degree the global economy.
More and more news reports are detailing how Chinese citizens are choosing to work from home and avoiding going out in public. We are even hearing of other Asian countries where individuals are choosing to self-quarantine in an effort to avoid any risk of contagion. Clearly these actions are going to lead to some level of deceleration in economic growth, albeit a short-lived slowdown. Economists and analysts have yet to notably revise down expectations for economic growth in China. On top of that, markets have largely shrugged off these economic risks, as evidenced by the MSCI China index gaining +0.5% year-to-date[i] going into today’s trading session.
Today’s move in the market is not what investors like to experience, but is not unreasonable given how markets have looked through coronavirus risks thus far. We view today’s move as the market adjusting to what will be some resetting of expectations around slowing growth in China during the first quarter.
[i]As of February 21, 2020. Source: MSCI