The world market reaction today is quite simply a joke! The reality is far more serious than euphoric investors would have us believe! Here is what I think is one of the most discerning, perspicacious commentaries in the blogosphere by The Australian's Alan Kohler.
Markets have been too complacent about coronavirus
The Dow Jones Average dropped 2.1 per cent on Friday after the World Health Organisation declared the Wuhan coronavirus a global emergency.
That was the first fall in four days. In general, financial markets have been far slower to respond to this new epidemic than the Chinese government, which is saying something, and as we enter the sixth week since the first infections in the last week of December, with 14,628 confirmed cases and 305 deaths, the markets have some catching up to do. That could mean a rocky week ahead.
The problem is that the advice to investors from banks and brokers has been based mainly on comparisons with the SARS epidemic of 2003, which has led them and their clients astray.
There are three key reasons why the SARS outbreak isn’t much help in understanding this one, and why the impact may be much greater this time.
First, in 2003 China was a much smaller economy. GDP was about $US1.3 trillion, making it smaller than UK, France and Germany; now it’s 10 times the size, and the second largest economy in the world with GDP of $US14.3 trillion.
And it’s not just about size: China is now much more deeply embedded in global supply chains and punching well above its weight in just about everything, especially manufacturing, tourism and education, and especially for Australia.
Second, the response is much more drastic. This time around the deny/delay period by the Chinese authorities was shorter – although it was there to begin with - but the response when it came has been much more severe, both in China and around the world.
The Chinese government seems to operate on two response settings: cover-up and over-reaction. The decision to entirely quarantine one of the top 10 Chinese cities looks like the latter, but at least there’s no cover-up.
And the third difference, perhaps the most important, is that in 2003 there was no social media in China or anywhere else for that matter. Now China has perhaps the most active, most ubiquitous social media on the planet, with the result that the general panic is faster, more widespread and bigger than in 2003.
Not only is communication fast and pervasive, there is much more travel to and from China than there was in 2003. Sixteen years ago few people went to China and even fewer mainland Chinese people travelled abroad, which meant that the West did not confront SARS until it had well and truly taken hold in China.
The combination of these differences could mean that the impact of the crisis on both the Chinese and global economies is much greater, because it isn’t so much disease itself that will cause the damage, but the response.
The market adjustment so far, including Friday’s New York sell-off, looks light on. Societe Generale predicts a 10 per cent sharemarket correction, but that’s probably only if the number of infections stops rising now and the response quickly de-escalates. That looks unlikely.
And it’s not just the Chinese economy that will take a hit, but the Australian economy as well as others in the region. Treasurer Josh Frydenberg talked about a “significant impact” on the economy on Sunday, but he lumped coronavirus together with the bushfires and said it was too early to be definitive.
But think about what’s been going on: the Australian government has cancelled all travel by Chinese people to this country, apart from those with relatives, the Chinese government quickly took the unprecedented step of preventing travel out of Wuhan and by last weekend, completely locking down one of the nation’s biggest cities, and 30 of China’s 31 provinces have declared a top-level emergency. Eleven airlines have stopped flying to China. Wuhan is running out of food. The streets of Beijing are empty as people all over China stay home.
A lot of rural villages have responded very strictly, forcing local families to cancel weddings and family gatherings, and a lot of cities are in a sort of unofficial self-imposed shutdown, with people deciding that staying home is the safest thing to do.
Governments, including Australia’s, have been mounting “rescue missions” to get their citizens out of the country and into quarantine back home, an incredible situation.
So with the number of cases and fatalities still growing, and no sign yet of a cure, the world’s second largest economy is basically cut off, internally and externally, and the world’s greatest nation of travellers aren’t going anywhere. For how long? It’s impossible to tell, and SARS in 2003 is simply no help in trying to figure that out.
In short, it’s a classic Black Swan – and so far investors are not taking it seriously enough.
It is too early to predict a recession on the back of the epidemic, but it’s pretty clear China’s economic growth is going to take a big hit: with a sudden collapse in consumer spending, you would think 5 per cent GDP growth will be hard to maintain, let alone the 6.5 per cent in the five-year plan.
Meanwhile it will be very surprising if the virus does not figure prominently in this week’s monetary policy statement from the Reserve Bank of Australia, no matter what happens to interest rates.
Of course, as with all Black Swans it’s impossible to assess the extent of the problem while you’re in the middle of it. The rate of infection could start dropping tomorrow and the quarantines and travel bans could start getting lifted next week, but right now that doesn’t look likely.
And we should keep it in perspective though: there were 59,000 lab confirmed cases of influenza in Australia in 2019 and close to 100 deaths; in the United States there are about 200,000 per year and apparently around 35,000 deaths. But those statistics are well known and stable – the problem with the Wuhan virus is that little is known about it yet.
Alan Kohler is Editor in Chief of InvestSMART.com.au