Style Analytics, a provider of factor analytics to the asset management industry, has examined the potential effects of the coronavirus outbreak on portfolios.
Damian Handzy, COO of Style Analytics, comments that the most surprising thing about their research into the likely financial effect of the coronavirus outbreak is that the closest analogy turned out to be the Chinese equity crisis of 2015.
“The 2015 situation appears to form a financial perspective closer to this than to all the other recent health and virus situations,” he says.
“We found that the global markets were all up during other contagious disease outbreaks such as Ebola or Sars, which kind of surprised us, but they were self-contained so didn’t scare the global markets.
“Also, China was a smaller part of the global economy at the time, whereas now it is pushing 20 per cent of world GDP.”
Style Analytics explains that the news about Coronavirus is changing fast. “The WHO has declared a global health emergency, the US has banned all foreigners who have visited China in the previous two weeks from entering the country and airlines around the world are cancelling flights to China, all as part of an effort to limit the spread of the disease.
“If history is any guide, we are only experiencing the early stages of this outbreak but containment efforts by governments in restricting travel may limit the worst of its impact to China. 2019-nCoV has a similar contagion rate to SARS, but appears to have a much lower mortality rate than either SARS or MERS, indicating that its bark may be worse than its bite.”
For its part, China’s financial regulators prepared a RMB1.2 trillion (USD173 billion) liquidity package to support markets on Monday February 3 and the People’s Bank of China is preparing to lower interest rates to support the economy.
Style Analytics writes that investors shouldn’t worry much about factor tilts if the virus remains contained to China but if the contagion results in a fear-scenario, investors might want to tilt towards low-volatility and away from small-cap stocks.
“Since the biggest impact of this virus will almost certainly be to the Chinese economy, the protection that low-vol and yield provided during the last Chinese equity crisis suggests a defensive strategy for factor investors as the world watches this latest crisis unfold.”
