Investors who play down the impact of the coronavirus outbreak may do so at their own peril, one economist argued in a Monday note to clients.
Neal Shearing of Capital Economics said that while the ultimate impact of the virus is “impossible to predict,” market participants who are looking to the 2002-2003 outbreak of severe acute respiratory syndrome, or SARS, as a guide to how the current situation will unfold should do so with caution.
“First, given the size and importance of China’s economy, the impact on the global economy is likely to be more significant than in previous epidemics (including SARS),” Shearing wrote.
Meanwhile, China’s more aggressive response today vis-a-vis the SARS outbreak will make its economic impact greater in China and abroad. “The steps to contain the virus – rather than the virus itself – are causing most of the economic damage,” he added.
“It is therefore significant that the response by China’s government has been both faster and more extensive than was the case with SARS. The Lunar New Year holiday has been extended for most of the country, keeping factories and other workplaces shut. Widespread travel restrictions have been imposed, transport services curtailed and tourist groups banned.”
The third major difference between today and 2002 and 2003 is equity valuations.
“The SARS virus hit at a time when global stock markets were starting to bottom out following the bursting of the dot-com bubble,” Shearing wrote. In March of 2003, during the height of the SARS outbreak, the S&P 500 index’s forward price-to-earnings ratio was around 17.3, according to FactSet, versus 18.2 today.
“In contrast, the Wuhan virus has hit ten years into a bull market for equities. With valuations no longer cheap, and in some cases a little stretched, investors are more likely to be looking for an excuse to sell rather than buy,” Shearing wrote. “The potential for the virus to trigger a significant market correction is much greater now than it was back then.”
U.S. stocks were bouncing back strongly from a Friday rout that saw the Dow Jones Industrial Average DJIA, +1.05% drop 600 points and pushed both the blue-chip gauge and the benchmark S&P 500 SPX, +1.04% into negative territory for January.