Company / Analytics

Analytics, 27 January 2020

How will the Coronavirus affect financial markets?

Financial markets around the world have been rattled by the coronavirus outbreak in Wuhan China. Wuhan is a strategic and centrally located city in China, with a booming car manufacturing industry. You can compare it to Chicago in the United States.

The spread of the virus has put Wuhan and four other cities with a combined population of more than 20 million people on lockdown. Travel has been banned during one of the most important seasons in China, the Lunar New Year, when up to 400 million Chinese travel across the country to celebrate with friends and family.

With Wuhan and other cities on lockdown, travels banned and the virus spreading rapidly, there are fears the virus could slow down growth in the world’s second-largest economy and cause global panic similar to the SARS virus in 2003. The SARS virus affected over 8,000 people globally and killed over 700 people and dragged Chinese growth.

For China, the coronavirus has come at a worse time, when its economy is still grappling with the impact of the US – China trade war. Investors hoping to benefit from phase one trade deal between the US and China may have to prolong their hopes. The travel bans could affect travel stocks while the closure of businesses like Shanghai’s Disney park will hit consumer spending.

The outbreak could hit parts of the global economy. The World Health Organisation, as well as some economists, have said that it’s still too early to panic or estimate the impact on China’s economy but fears of a Chinese-led global slowdown has hit some commodities markets like oil and copper. International oil prices fell 3% in the wake of the outbreak while metal stocks fell on the London Stock Exchange.

Slower growth of the Chinese economy would impact American and European countries that rely on exports to China. There was a sharp sell-off in some Chinese markets including Hong Kong, Shanghai and Shenzhen which went down 2 – 3.5 % in the week of the outbreak.

The most affected industries or sectors will be tourism, retail sales and travel which will be hit follow reduced sales from the seasonal Lunar New Year. The Lunar new year is often an opportunity for European luxury sales, where the Chinese market represents over 35% of global income. The travel bans will dent sales and shares of European luxury sellers (mostly Louis Vuitton, Gucci and Cartier) as well as hotel groups and airlines. During the SARS outbreak, visitor numbers to mainland China dropped by 26% and by nearly 60% to the affected province of Guangdong.

On the positive side, the shares of global pharmaceutical companies such as drug makers could benefit. Companies working on a vaccine against the virus will benefit in the long term. Already Chinese companies that manufacture drugs and protective equipment such as surgical masks and gloves have seen a surge in demand for these items and some sharp rise in prices.

As the impact of the virus is still emerging, investors will remain cautious of Chinese stocks while the market will continue to rattle, until it stops spreading.

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