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Graph of the week

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21-02-2020 | Insight

Limited impact of the coronavirus on stock markets

  • Jaap  van der Hart
    van der Hart
    Equity Fund Manager
The equity markets are holding up well, despite the ongoing coronavirus epidemic. The number of confirmed infections now stands at over 75,000, with 2,009 fatalities (WHO figures, 19 February). These cases are concentrated in China and in particular the province of Hubei.

China has taken drastic measures to contain the virus, including a lockdown of the epicenter Wuhan, various travel restrictions, mandatory quarantine and an extension of this year's Chinese New Year Holiday, which started on 25 January. Many Chinese people are staying home and factories are closed. The question is: what does this mean for the economy and the stock market?

The official economic figures for February won't be published until March, but there are various short-term indicators. These confirm the picture of a stagnant economy in recent weeks. The numbers of travelers, for example, has fallen by 70%, sales of new houses have come to a virtual standstill and coal consumption did not rise after the Chinese New Year, as it usually does

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Market holding up surprisingly well

And for the factories that are still open, the question is whether they can get enough components if their suppliers remain closed. First-quarter growth will be hit hard, even though the exact impact is still difficult to gauge.

Yet, despite all the malaise, the Chinese stock market is doing surprisingly well so far. When at the end of January it became clear that the virus would have serious consequences, the market took a nosedive, only to rally strongly again in the weeks that followed. In February, China is in fact one of the better-performing emerging markets.

While it’s true that stocks of airline companies, hotel chains and other travel-related businesses have fallen significantly, these form just a small part of the market. Many technology and internet-related companies have done relatively well.

Confidence in recovery

There is confidence in the market that the current measures will be enough to prevent further spread of the virus. Although the total number of infections is still increasing, the number of new infections is gradually starting to come down. What is more, the number of people recovering from the virus has now exceeded the number of new infections.

In addition, the government has taken measures to mitigate the economic damage, such as interest rate cuts and extra fiscal spending. This will prevent companies that remain closed from getting into financial difficulty so quickly. No doubt it will not prevent economic growth and many companies’ earnings from being significantly lower in the first quarter. However, there is optimism that the economy will return to normal growth from the second quarter.

The economy in various Chinese cities is very slowly returning to life, after the extended holiday and two weeks of quarantine that many employees have to endure. A full recovery, however, will only happen once people feel free and safe to travel and meet up again. For the time being, the first priority for the Chinese remains to stop the virus from spreading further.

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