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Markets face falls equivalent to 2008 levels


A tumultuous week for financial markets has seen the rapid spread of the coronavirus have a severe effect, with analysts predicting that if the outbreak turns into a full-blown global pandemic, it could be as bad as during the financial crisis, when global GDP fell by 0.5 per cent.

At the time of writing, 29.2.20 am in the UK, equities are down a tenth of their value, with MSCI’s Asia Pacific index down 2.5 per cent, the Stoxx Europe 600 down 4 per cent and the FTSE 100 down 3.6 per cent. 

Overall the MSCI Asia Pacific has dropped 10 per cent over a week, the worst result since 2008.

So far, worldwide, roughly more than 83,000 people have been infected and close to 3,000 have died. 

The key impact for investors globally seems to be in the technology sector with shares of Microsoft Corp falling more than 4 per cent after the company warned of weakness in PC business due to a hit to its supply chain from the coronavirus outbreak.

This echoed similar statements from Apple Inc and HP. The drop in share price wiped off nearly USD50 billion from the Microsoft’s market value.

Brendan Ahern, Chief Investment Officer at China specialist ETF firm KraneShares, conducted a timely webinar on 27.2.20 on China’s economy and the impact of the coronavirus which identified five key points.

He noted that Hubei Province is disproportionately affected. Over 80 per cent of confirmed cases and 95 per cent deaths are in Hubei. 

Ahern writes: “Hubei accounts for 5 per cent of China GDP and is not as wealthy as Guangdong, the epicenter of the SARS outbreak in 2003. Healthcare facilities in Wuhan and broader Hubei province were likely overwhelmed by the sudden outbreak.

“The elderly and those with pre-existing medical conditions are disproportionately affected. About 80 per cent of people who died from the virus in China were over the age of 60, and 75 per cent had pre-existing conditions, according to a recent report from China’s National Health Commission. We believe that China’s high rate of smoking is a significant factor. A respiratory ailment combined with a weakened immune system and limited lung capacity, is having an unfortunate effect.”

Ahern believes that there are positive signs in the fight to contain the outbreak. He writes that quarantine measures appear to be dampening the spread outside Hubei. 

“China’s daily new confirmed count outside the province has declined for the past 13 consecutive days. While China and United States have taken significant steps to limit travel to effected areas, many countries have not. These countries, particularly in Asia and Europe, are apt to quickly enact similar policies to limit travel to effected areas.

“Markets will discern winners from losers. China has not lowered its 2020 GDP targets despite what will be very disappointing Q1 economic data. Within China, firms related to ‘Old China’ economic sectors and their underlying stocks such as transportation, brick-and-mortar retail, real estate, tourism (hotel, airline and restaurants) and commodities are being adversely affected. Stimulus in the form of fiscal and monetary will be focused on these areas. The outbreak may have a positive effect on health care, E-Commerce, and online entertainment/education.”

Ahern believes that investors should be prepared for limited travel globally and especially in Asia. He concludes that the US and China imposed dramatic curtailments to air travel and the downturn in air travel could dramatically affect hotels, restaurants, and other tourism related industries.

Turning to sectors, KraneShares writes that key areas to be affected are Travel & Tourism, with short-term negative impact as travel volume has dropped dramatically due to travel restrictions. E-commerce, with a short-term mixed impact as delivery is harder under quarantine. Long term, KraneShares believes that the penetration rate could go even higher as most people have to use e-commerce for shopping, especially for groceries during the virus outbreak.

Online Education will enjoy a positive short-term impact as parents prefer that their children study from home, KraneShares says, as will Online Entertainment (video, social and games). “Positive impact from additional time at home. The internet is the favoured source of entertainment among those who are stuck indoors due to quarantines, especially among young people.”

Finally, KraneShares expects Health Care to enjoy a positive medium-term impact as large pharmaceutical companies may see revenues increase from the sale of pain medicine and antibiotics. Traditional Chinese medicine companies may also see revenues increase as people may turn to alternative treatments given the crowding of conventional hospitals and clinics, Ahern writes.

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