Rat year beaten down by coronavirus


  • Economy
  • Saturday, 01 Feb 2020

THE Year of the Rat started off with an ominous bang, quite contrary to what people normally hope for with the dawn of a new year.

The Chinese New Year celebration started on Jan 25, which was also the date the coronavirus officially spread its webbed wings to Malaysia.

For investors who were expecting a treat and for stocks to rally during this period, quite the opposite happened.

Malaysia’s first trading day in the Year of the Rat saw the local market taking a hit, in line with a global selloff, as investors scurried away over fears of the economic impact from the coronavirus outbreak.

The FBM KLCI, tracking the overnight fall on Wall Street and key Asian markets, ended the day down 21.17 points or 1.35% to 1,551.64, its lowest since October last year.

As of Friday, the market closed at 1,531.06, meaning its down 2.65% since Chinese New Year, and 3.63% down on a year-to-date basis.

To date, the Wuhan coronavirus has been detected in countries that are typically China’s trading partners such as Thailand, Japan, South Korea, Taiwan, US, Singapore, Vietnam, France, Nepal, Australia, Canada, Germany and Sri Lanka.

As of yesterday, about 9,800 cases have been detected worldwide, mostly in China. Some 200 deaths have been blamed on the virus, all in China.



Impact on markets

When or how the coronavirus pandemic will end remains to be seen. However, looking at the history of how markets and investor psychology have reacted during those periods, there may be some hint as to how the market and economy will perform over the next few months.

Past statistics have shown that the fall in stock markets due to plagues and epidemics are typically temporary.

“Breaking news of a fast-spreading illness may sway some stocks in the near term, but the likelihood of a material, lasting downturn tied to one seems exceedingly low. History has overwhelmingly shown markets typically move on quickly from disease-related pullbacks, and even the most severe outbreaks haven’t caused bear markets,” says Fisher Investment.

Gauged by the market’s performance during the onset of other infectious diseases, including SARS, Ebola and Avian flu, the market’s reaction to such outbreaks has been short-lived.

The reaction to these diseases almost follow a similar pattern whether from a year to a decade ago.

As is standard when new diseases appear, headlines are linking the outbreak to market volatility and warning of a more serious impact.

SARS, much like the current coronavirus, emerged from China and caused respiratory infections.

SARS, which lasted almost six months from November 2002 to March 2003, resulted in about 8,100 people getting sick, with 774 people dying, according to data from the World Health Organisation and the Centers for Disease Control and Prevention.

Similar like today, there was intense media coverage and the rush on surgical masks as folks panicked to protect themselves.

During the height of SARS, the S&P 500 endured a 14.2% correction from Nov 27, 2002 to March 11, 2003. Meanwhile the FBM KLCI was down 1.5% during that period.

Following dissipation of the disease, the S&P 500 subsequently finished 2003 up 28.7%. Meanwhile the FBM KLCI was up 25.55% that year.

As for the Avian flu, a fast-moving pathogen also known as H5N1, it first reared its head in April 2006. This outbreak was shorter and ended by mid-June. During that period, the S&P 500 was down 5.71%, while the FBM KLCI was down 2.69%.

The moment risks of the Avian flu began dissolving, markets started surging.

The S&P 500 rose 11.66% in the roughly six months following the end of the 2006 Avian flu epidemic.

As for the FBM KLCI, it finished 2006 about 22.78% higher.

Fisher Investments says it can see the logic behind disease-related fears.

After all, if a big chunk of the world’s population is sick in bed (or worse), they aren’t making the economy go. It is natural to anticipate this showing up in economic data, and it isn’t surprising that markets might price this in real-time.

“We remember back in spring (March to May) 2009, when the economy was still in recession and stocks were just starting to recover from the financial crisis, when swine flu broke out. Headlines were sure it would spiral into a deadly global pandemic, derailing the nascent recovery,” says Fisher Investment.

However the market impact was muted; a 4.9% S&P 500 drop from May 8 to 15 (when the fear first hit) and a 7% pullback from June 12 to July 10 (as the casualty tallies in America and Europe rolled in).

Looking at it from a bigger perspective, it was part of a two-month flat stretch in an otherwise exciting year. The recession ended that summer (June to August), with the Dow Jones also finishing 20.19% higher in 2009. The FBM KLCI also ended 2009 up 42.31%.

While researchers eventually estimated the death toll at 100,000 to 200,000, sad as this may be, it was far below the millions of casualties people initially feared.

Fisher Investments says that even bigger pandemics haven’t derailed markets. For instance, the Centers for Disease Control and Prevention estimates the 1957 to 1958 bird flu pandemic killed 1.1 million people globally, including 116,000 in the United States.

“When the outbreak began in February 1957, stocks were already in a bear market that began the previous August tied to the Suez crisis. That bear would run on until late October 1957, but a bull market began well before the disease was in check,” it added.

Thus, it is perhaps best to keep a cool head and not to make quick changes to one’s portfolio during this time. Using history as a guide, epidemics and pandemics have yet to chip away at the growth of markets and economies. This could even be an opportunity to buy.

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