A men wearing a mask walk at the Shanghai Stock Exchange building at the Pudong financial district in Shanghai (Photo: Reuters)
A men wearing a mask walk at the Shanghai Stock Exchange building at the Pudong financial district in Shanghai (Photo: Reuters)

Risk of markets catching coronavirus infection cannot be ruled out

  • While the epidemic looks largely confined to China, a global spillover is a vast and terrifying headwind risk
  • Major global markets have barely reacted to the coronavirus since it broke out a month ago, while the S&P 500 index even posted some gains

Mumbai: China has caught a severe cold, but it is yet to infect the stock markets. Both the MSCI World Index and the Dow Jones index have so far corrected marginally since the outbreak of the deadly coronavirus. India’s Nifty 50 index has recovered from a post-budget plunge and is back above 12,000 points.

While the epidemic looks largely confined to China, a global spillover is a vast and terrifying headwind risk. “We expect a big economic shock to China with large spillover effects on the rest of Asia, but the depth, breadth and length of 2019-novel coronavirus is uncertain," said a report by Nomura Global Markets Research on 7 February.

So, why are markets overlooking the risks? Some of it can be explained by drawing parallels with the Severe Acute Respiratory Syndrome (SARS) epidemic of 2003. After the virus was contained, China rebounded quickly. As the coronavirus is from the same family as the SARS virus, expectations this time are that the damage will be limited.

Still, while the damage from the coronavirus is unfolding, the potential for economic disruption is immense. More than 37,500 people have been infected and an entire Chinese city quarantined, disrupting social and economic life. Back in 2003, when SARS struck, China accounted for just 3% of global gross domestic product. Today, it makes up 16%. Hence, the full impact of the outbreak could yet be underestimated.

A recent UBS Investment Bank report expects the baseline disruption to be so vast that it lowered its first quarter global growth forecast from 3.2% quarter-on-quarter (q-o-q) annualized to 0.7% and “78% of that revision comes from China, where we lowered the q-o-q seasonally adjusted annual rate of growth by 800 basis points and now expect a 1.5% contraction", it added.

A bigger impact could be felt on Hong Kong and Asia-Pacific countries dependent on China, particularly South Korea, Malaysia and the Philippines.

(Graphic: Naveen Kumar Saini/Mint)
(Graphic: Naveen Kumar Saini/Mint)

“There is no direct impact on India. However, it cannot be immune to the impact. We have downgraded the Asia gross domestic product growth rates and this would have a bearing on India," said Tanvee Gupta Jain, chief India economist at UBS Investment Bank.

China is India’s third-largest goods export partner, accounting for goods worth about $17 billion, or about 5% of our overall goods exports. Any likely slowdown in growth in the virus-hit Chinese cities could further drag on raw material demand from India and, thus, pull down exports further. Discretionary spending in the region could be hit, and curtail retail, travel and tourism.

India’s major sectors such as pharmaceuticals, automobiles, chemicals, consumer durables and electronics are the most exposed, with some supply chains linked to the Chinese mainland. But that may not roil India as much. “The slowdown has seen some stocking of raw material and finished goods inventories. So, manufacturing may not be impacted in the near term," said Amar Ambani, senior president and institutional research head at Yes Securities.

Some negatives for companies could be counterbalanced by the macro support of lower oil prices and other costs. But the extent of the damage, particularly on discretionary spends, will depend mainly on how long the virus lasts.

“Discretionary spending will be the first to get hit. Hence, auto, retail and tourism in the region will see contraction," said Pankaj Pandey, head of research at ICICI Securities Ltd.

A section of the market reckons the stringent measures taken by the Chinese government will contain the damage. Moreover, some expect the impact of the virus to recede by summer.

“The coronavirus is not a big risk. While it may take time for normalcy to return, India’s stock markets are much better placed now," says George Heber Joseph, chief executive and chief investment officer of ITI Asset Management.

What is the upshot then? Indian markets may be relatively insulated for now, but will take cues from the global market. Low bond yields are a key driver for the global market and central bank actions have been positive through stimuli and rate cuts.

Meanwhile, the perception prevails that the domestic economy is bottoming out and earnings may perk up next year.

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