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Should investors be concerned that the Coronavirus outbreak in China will impact markets?

24 January 2020

The outbreak of a new strain of Coronavirus has recently emerged in the city of Wuhan in China. Yesterday, the main Chinese equity market (the CSI300 Index) fell by more than 3%, as investors became concerned about the extent of the impact of the virus. This move may have been exaggerated by thin trading ahead of Chinese New Year break; however, with the Shanghai market now closed until next Thursday, we will have to wait and see how the market responds to the fluid situation on the ground. Movements in other markets have been much more muted.

When the World Health Organisation (WHO) met this Thursday, there had been 557 confirmed cases of the virus and 17 confirmed deaths. Most of these were in Wuhan, but there has been a small number of cases reported elsewhere, one being in the US. However, the numbers are rising rapidly. Wuhan is a city of 11 million people – to put this into perspective, London has around 8 million people – so the proportion of people infected in Wuhan so far has been small. The WHO decided not to declare a "Public Health Emergency of International Concern", due to the limited international spread of the virus; however, they are likely to revisit this decision should the situation deteriorate. The Chinese New Year celebrations mean that many people are travelling, which will make it harder to contain the spread of the disease.

The last Coronavirus to impact markets was the SARS-Coronavirus that caused widespread concern between 2002 and 2004. SARS also began in China, and according to the WHO there were around 8,000 cases across 26 countries and over 800 deaths in 2003 (some countries had just a single case). The SARS scare caused a sharp decline in travel and tourism, and Asian stock markets fell sharply. There was a degree of fearmongering, with reports suggesting a global impact that generally failed to materialise. In the end, the outbreak was short lived, and the Chinese stock market recovered quickly. However, assessing the market impact of SARS is complicated, as there were many other events happening at that time, including the US invasion of Iraq.

Lessons have been learned from the SARS epidemic. Since then, China has invested in many laboratories for testing and disease control. They have also introduced further measures to better manage the situation. In 2002, China was deliberately secretive about the outbreak, and initially gave little information to the outside world. However, this time they have been more open in sharing details with the WHO. In addition, their reaction has been considerably quicker in order to warn the public, they have made the use of facemasks obligatory in certain areas and are shutting down public transport as a precaution. These measures should help slow the spread of the disease. Monitoring at international airports, including London Heathrow, has been stepped-up, and the official risk level in the UK has been deemed "low". As it stands, SARS appears to have led to a higher proportion of deaths than this new strain of the Coronavirus. Thus far, deaths from the new virus have, in most cases reported, been from the elderly and those already sick. However, it is still early days, and these viruses can mutate, meaning they can potentially become more dangerous.

Returning to the main question of whether or not investors should be concerned about this new outbreak in China. In the case of the SARS outbreak, the impact to the economy and to markets was felt most acutely in response to the precautionary measures taken, rather than from the scale of the infection itself. When the infection was eventually contained, markets that were impacted recovered quickly. With the Wuhan Coronavirus, precautionary measures have been taken early and the treatment of viral diseases has improved since then. In the short term, travel companies, airlines and retail companies in the areas affected are likely to be marked down due to the restrictions being implemented. Chinese New Year events have been cancelled in Beijing and Shanghai, and Disney Land is preparing to close. Pharmaceutical companies developing drugs for the treatment of viral infections are likely to benefit from the epidemic. However, as far as the wider picture is concerned, investors with a globally diversified portfolio should not be too concerned at this time. We will of course be monitoring the situation closely.

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