Will fears of the Wuhan Coronavirus continue to hamstring markets?

Today the Chinese Government announced that the number of Wuhan coronavirus infections had passed 20,000 people. So far, the virus has killed 425 of these individuals, with this number now greater than the number of fatalities from the SARS virus in China. Despite this, markets are rallying higher today, following a rebound in US markets overnight.

This rally has likely been supported by the injection of Chinese stimulus into markets and their economy, but despite this, risks persist.

If history is anything to go by, markets are likely to continue seeing selling until the net new cases of the virus has peaked; which is what happened under SARS and other notable viral outbreaks.

There is also much speculation that China is either deliberately or inadvertently under-reporting the true number of infections, with The Lancet, an international medical journal, publishing a report that estimates more than 75,000 infections in Wuhan alone. They also reported that “epidemics are already growing exponentially in multiple major cities of China with a lag time behind the Wuhan outbreak of about 1–2 weeks.”

The direct impacts of the virus are already starting to be seen. Energy prices are dropping substantially due to an expected drop in travel and freight due to the virus, travel bans are likely to reduce tourism, travel, education, and perhaps even retail sales, and all of this could damage listed companies and their earnings. The Reserve Bank of Australia (RBA) went as far in its statement today as to declare that the virus is ‘having a significant effect on the Chinese economy’.

Indeed, it has been reported that China is considering lowering its economic growth targets for calendar 2020 due to the negative impacts of the virus. The RBA also warned that the ‘coronavirus outbreak will temporarily weigh on [Australian] domestic growth’.

The longer and further the virus spreads, the greater the impact on the global economy. The greater the impact on the global economy and the more sensational the media coverage, the more selling we are likely to see in global markets.

Companies that have been immediately impacted by the virus, such as travel related stocks, have already seen some serious selling, but many of these stocks have rebounded today. Regardless, prominent investors, such as former PIMCO CEO Mohamed El-Erian, have warned that the virus could shake markets out of their current ‘buy-the-dip’ mentality.

Although we have not seen real market selling for some time, it may still pay to be cautious.