By reading the title of the blog i am sure that most of you have already wondered about this. Most of us if not all of us are thinking about coronavirus, concerned and in fear of what is happening in China and around the world.
The main tragedy of it all is the number of lives lost and how many more lives could be lost. This has been messing with my brain the last few weeks. So before i go on i want to pay my deepest condolences to the families affected and a quick recovery to all patients.
Unfortunately,there is a lot more to it. Apart from the horrific rate of death toll, we have heard of cities shutting down and a lot of people have been put into quarantine. Therefore, as an accounting and finance student i cant help but wonder how this horrible virus has effected markets and how it will effect the global economy.
The coronavirus began its outbreak in the very busy city of Wuhan, China. However, cases have been popping up globaly, causing the World health Organisation to declare a global health emergency. This has obviously affected markets with both US domestic and international equity. Currencies, commodities and bond markets have all been affected, creating uncertainty in all of those markets.
since things are looking risky at the moment, people pile into government Bonds thinking “hey! Government bonds are safe!”. As a result more and more people are putting money into those Bonds causing them to increase in price.
Furthermore, oil is taking a major hit on its price as a number of countries and airlines have restricted travel to China, resulting in a decrease in the demand for fuel, which will result in a decrease in oil prices. This has caused energy bonds to take a hit.
Currencies in countries that do business with China have also taken a hit. For example, copper prices have already been affected and steel prices could be affected as well, since there could be a construction slow down.
So to put things into perspective, there’s nothing that the virus hasn’t affected up to now. and now the question becomes How concern do we need to be?
I don’t believe at this point there is anyone that can provide a sure answer. There is no prior information on how long and on how big of an effect this specific virus can have. And for me this is the most scary part. How well can countries prepare for a virus they’ve never dealt with before? There are no long term statistics that can provide an insight. We’ll have to wait and see, which is a frightening thing.
tha Sars virus, which originated in China in the 2000s, is the most recent virus that could be compared to the Coronavirus. Even though I’m sure scientists can find similarities between the viruses, I worry for the differences . In the early 2000s, China did not have the world’s second largest economy, as it does today. Therefore, the effect that the Sars virus had on the economy will be signifacantly less than what is anticipated by the coronavirus in 2020. Think of it in the simplest way possible. If people in cities like Wuhan, are staying in then they will not go out to eat, shop etc. As a result, stores have already been shut down. US multinationals, such as McDonalnd’s and Starbucks, have shut down their stores in China. Moreover, if people aren’t spending any money or doing things to stimulate economy then all of that is simply contracting it. It may be that consumers in China spend money externally, but let’s not forget that many countries have at least some part of their supply manufactured in China. For example, Apple has already stated that Coronavirus is expected to affect their products and supply chain which is somewhat the reason behind the markets taking a turn.
Looking at US S&P 500 for example, you’ll notice that it was not looking good on Monday and since then things came back up a bit. I believe this is exactly the concept of not really knowing what’s happening and what the effect will be. It’s important to remember that assets should be valued according to their fundamentals but in actuality, prices can change just like that based on the investors’ emotions. If a virus were to turn into a pandemic it would then be something called a “black swan event” which is in fact an unexpected event that negatively effect the prices of assets. That’s exactly what happened in 2008 , when the world had experienced the black swan event otherwise known as the financial crisis. No one really saw it coming and how do you price that type of crisis into a portfolio? Very Difficult.
Just to help end this blog on a positive note i would like to comment on evidence from JPMorgan that shows prior major illnesses and their market’s effects. What this evidence basically showed is that during the outbreaks, markets have fallen but one to three months post outbreaks markets have recovered. Is this the case with the Coronavirus? Nobody knows just yet. Let’s not forget however that these are real people, real families and not just numbers serving as evidence.