WORLDVIEW: Why is the coronavirus freaking markets out?

The outbreak of the Wuhan coronavirus has caused widespread alarm. With over 4,000 cases identified all over Asia and in the US and Europe, the streets of many global cities are now filled with people wearing medical masks in hopes of fending off the potentially life-threatening respiratory virus..But, while people may be anxious, the real panic has been felt in global financial markets. On Monday, the Dow, the S&P 500, and the Nasdaq all recorded falls of between 1.6 and 1.9% as fear of the impact of the virus spread. Chinese stock markets were already slumping – they fell nearly 4% before shutting down for the Lunar New Year – and European markets fell too – the FTSE 100 and the Dax were down more than 2%. As for the JSE, it was down almost 3%..Why would a virus that has affected only a few thousand people be causing such dramatic financial market panic around the world? After all, previous viral outbreaks, such as SARS in 2002/3, had a limited impact on markets. The chart below, taken from the Financial Times, illustrates the point..___STEADY_PAYWALL___.However, there are several legitimate reasons to worry about the coronavirus's impact on the economy. Most importantly, it has the potential to be widely disruptive, hitting global sectors such as luxury goods, tourism, airlines, banking, automobiles, and tech through its impact on one key nation: China..For the last thirty years, China has been a key driver of global growth. Much like the US in the early 20th century, when it was an emerging market, China has been the engine that has powered economies around the world. Its demand for natural resources has fuelled resource-based economies like South Africa's, its low-cost manufacturing output has boosted living standards around the world, and its growing demand for consumer goods has injected new life into key US and European sectors like tech and luxury goods..In the last few years, however, China's growth has stumbled. After growing at double digits for around 40 years, it is now projecting growth of around 6% a year – the inevitable consequence of its ongoing shift from a manufacturing-based to a consumer-led economy. More recently, trade tensions with the US have injected uncertainty into China's prospects, weakening its currency and raising fears over its enormous debt pile..The coronavirus, therefore, came onstage in an already tense economic scene. China jitters have now become full-blown China panic – investors are worried that the virus could mean interruptions to Chinese output and Chinese consumers' buying habits. If production falls and Chinese consumers cut back on their purchases, China could be in for a bad year growth-wise, with serious negative consequences for the rest of the world..The bad timing of the outbreak is adding further fuel to these fears. The outbreak was reported just ahead of the Lunar New Year (although it seems to have started earlier than reported), as millions of Chinese holidaymakers were preparing to travel. Despite draconian Chinese travel restrictions, the virus has already spread rapidly, and cases have been reported in virtually every province of China. This is causing widespread fear within China and has led to many millions of Chinese cancelling their holiday plans and skipping trips to the mall for fear of exposure to the virus..Fewer trips abroad and less shopping could be devastating to luxury goods and consumer electronics manufacturers, who rely on the Lunar New Year shopping season for a good chunk of revenues. It could also hurt the many vacation destinations that have become increasingly reliant on Chinese tourists, from London to Macau. Airlines would similarly suffer..Thus, the coronavirus could have a real, material effect on many aspects of the global economy. If the virus spreads as rapidly outside China as it has within, these effects will be magnified. Travel bans could impact trade and business services, as well as undermining consumer confidence..We know that the coronavirus is highly infectious. Researchers estimate that each infected person will infect between 2 and 4 others – much higher than the equivalent rate for seasonal flu of 1.4. It has spread rapidly, and some epidemiologists estimate it could affect nearly 200,000 by early next week..The faster the virus spreads and the more people it infects, the more potentially severe its economic consequences – to say nothing of the human cost of an incurable and potentially fatal disease..Yet, despite the threat posed by the virus, there is cause for hope. As noted earlier, previous outbreaks of contagious diseases have had only a short-term impact on markets and the broader economy. Unless the coronavirus turns out to be a deadly global super virus, which would pose an existential threat to the global order, this too shall pass.

WORLDVIEW: Why is the coronavirus freaking markets out?

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