How has the Corona Virus affected Chinese Markets?
The first case of the corona virus was identified on the 31st of December. It caused speculation and fear among investors, particularly those invested in the Chinese market. The virus spread swiftly and at the end of January the HSCEI (Hang Seng China Enterprise Index) which tracks the Chinese market had dropped 6.1% in just one month as shown by the chart below.
The last time we saw such a substantial movement in this Chinese Index was back in August 2011, when it dropped by 6.2%. Although, this was due to fear of contagion from the European sovereign debt crisis and the US credit being downgraded to AA+, rather than a virus.
How do these movements impact other markets?
The below graph correlates the S&P 500 US Index with the HSCEI index during major global events occurring between 2012 to 2020. The bars show similarities in price highs and lows. Notably, 6% of accounted revenue for the S&P 500 came from China in 2019, nearly twice as much as any other country that trades with the US. This is concerning not just for China and the US, but also for global companies because large revenue streams from international companies are generated from Chinese exports.
In the current market situation, many investors are expressing caution. Potentially from the memories of the 2003 SARS outbreak. The SARS epidemic arose in November 2002 ended in July the following year. On that occasion the HSI lost 10% as the numbers of confirmed cases rapidly accelerated. We may see this happen again, although, the Corona Virus is not considered to be as impactful as SARS.
On the positive side of the market, Chinese pharmaceutical stocks have risen dramatically due to increased demand. For example, the Chinese drug maker Ascletis jumped 33% during the outbreak.
What is the impact on different sectors?
The Chinese government have imposed quarantines on 15 cities and 56 million people are currently unable to travel. With the blockades imposed, there is a detrimental impact on logistics for many tech companies because supply chains have been be disrupted. Wuhan, the city where the virus originated, is known for its big industrial centre and manufacturing of steel, smartphones and automobiles.
Companies like Etihad are fully reimbursing the ticket cost for passengers traveling to China and there are follow on impacts form reduced tourism. For example, an average Chinese tourist travelling to Hawaii would spend around 349 US Dollars per person which could make the US hotel industry vulnerable. Furthermore, European luxury companies get about 35% of their sales from travelling Chinese customers.
Major production companies like Toyota announced that they will close the plants located in China. Similarly, other international companies like Starbucks have closed 4,292 stores in China which is equivalent to more than 50% of their outlets. Ikea, that employs 14,000 people, closed 15 out of 30 stores.
On a positive note, we can see the Chinese government acting rapidly compared to the SARS epidemic. The government was quick to quarantine various cities and helped to prevent the spread of the disease. In an age of social media, panic can spread a lot quicker so responding quickly is more important than ever.
Should I be concerned for my investments?
As we saw after previous viral outbreaks, markets returned to normal levels in the months after the epidemic. For investors with a long term outlook, we would recommend to stay invested during this time. The below chart shows how the global market adjusted accordingly in the months following similar events .