Spread of virus outbreak across the globe has sparked a massive sell-off in world markets
Global real GDP is expected to shrink by 0.8 percentage point in Q1, according to Moody’s Analytics
Coronavirus infections have now spread to more than 55 countries and, globally, investors are hitting the panic button. The S&P 500 index of the US has tumbled 11.5% in the past week, while the National Stock Exchange’s Nifty 50 index barrelled down 7.3% in the same period. In Friday’s bloodbath on the Street, BSE’s Sensex tumbled 1,448.37 points.
As the virus shows no sign of stopping, a long-term global economic meltdown now looms on the horizon. “The coronavirus is expected to reduce global real GDP, excluding China, by 0.8 percentage point in the first quarter of this year and 0.3 percentage point for all of 2020," said Moody’s Analytics in a report. But downside risks to these projections are high.
Stretched equity valuations are further exacerbating the fall. Despite the virus causing plenty of damage in China, Indian and global markets were trading at sky-high valuations only a month ago. In fact, the Nifty 50 soared to a price-earnings multiple of over 19 times based on FY21 earnings, which was near its historical highs.
But now with Europe emerging as a hotspot for the disease and the US reporting an increase in the number of cases, how long the contagion roils the markets is anybody’s guess. Jefferies India Pvt. Ltd has warned that the “large outbreaks of COVID-19 (coronavirus) in South Korea, Italy and Iran point to the risk of a global pandemic that, if not handled correctly, could swamp hospitals with acute cases. If not managed correctly, this could significantly rattle markets."
Travel and tourism, and other related sectors are expected to shrink. Slumping tourism will cost Asia up to $115 billion this year, noted ING’s global economists. Markets fear the spillover effect will impact airlines, hotels, travel and tourism, and retailing across Asian countries, Europe and the US.
Cyclicals are already reeling under a sell-off from the coronavirus epidemic as prices of major metals are down. Sectors such as pharmaceuticals, and upstream oil and gas companies are also vulnerable to a slowdown, as China now accounts for about 15% of the global economy, besides being a major supplier of raw material.
“A prolonged shutdown of manufacturing units in China will also limit the availability of key components for automobile OEMs (original equipment manufacturers) as well as spare-parts in replacement markets, consumer durable companies (refrigerators, washing machines, electrical appliances) and non-durables like adhesives, paints, etc.," noted a recent Kotak Institutional Equities report.
India is not immune to the global risk-off sale. Stocks could regain their footing after a few months, as past epidemics have shown. But whether it happens in three or six months, or more, will depend on how quickly the virus is contained.