Right now, healthcare workers across the globe are preparing to handle a new strain of coronavirus. The Novel Coronavirus (2019-nCoV) has been classified by the World Health Organization (WHO) as a high risk global health event. With thousands of cases confirmed in China, the virus has spread beyond its borders, with many cases spread across 21 countries, including Canada (as of January 30th).
With the WHO classifying the virus outbreak as an international public health emergency, Canadian hospitals are already implementing lessons learned during the 2003-2004 SARS outbreak and they're confident in their ability to contain and manage the spread of the virus.
As health professionals around the world work to assess the situation, manage the spread of the virus and treat the infected, we at MD Financial Management have been closely monitoring the economic and market impact in relation to our strategy and portfolios.
China's response is impressive and unprecedented
Actions taken to contain the virus by Chinese policymakers have been unprecedented. Multiple cities, totaling over 45 million people, have been quickly quarantined. A 14-day incubation period for those traveling from the outbreak epicenter—Hubei province—has also been initiated in major cities like Beijing and Shanghai.
Additionally, the Chinese Lunar New Year holiday has also been extended to February 2nd. The Chinese equivalent of Thanksgiving in the U.S. or Christmas, it's a major driver of economic activity. Start dates for new semesters at schools and universities have also been postponed.
In the city of Wuhan, the government is rapidly building two hospitals to combat the coronavirus outbreak. Announced on January 24th, the first 1000-bed hospital is scheduled to accept patients on February 3rd. The second 1500-bed hospital is due open on February 5th.
Short-term negative impact is likely, followed by recovery
It's too early to properly assess the full potential impact the virus could have on capital markets. There are historical examples we can draw from. For example, during the SARS outbreak in 2003, we experienced a drawdown in stock markets as news broke, followed by a quick recovery as signs of stabilization appeared.
A key difference, China's role in the global economy has grown exponentially since 2003—its share of global GDP now rivals that of the U.S. But that doesn't necessarily mean the coronavirus will have a larger economic impact, after all, policymakers have acted swiftly and decisively in contrast to their actions during the SARS episode.
Based on historical precedent, we believe the short-term impact on the global economy will be negative, but that there is potential for a quick recovery once the situation is reined under control.
More uncertainty clouding the global economic outlook
Prior to the outbreak, our market outlook was driven by a stabilizing global business cycle after the slowdown that began in 2018. We saw signs of this scenario playing out as growth in the U.S. and China rebounded, although weakness persists in the Eurozone.
Contributing factors included the easing of both monetary and fiscal policy through 2019 and improved sentiment towards geopolitical stressors such as U.S.-China trade and Brexit—both key factors driving the slowdown.
At this time, we don't believe we need to alter this outlook, but the added uncertainty has had a negative impact on markets, with stocks and commodities selling off and investors moving to safer assets like treasury bonds.
We are continuously assessing the situation
Right now, we are exercising prudence as we assess the situation and we think it's too soon to make any material portfolio changes at this time. With that being said, given China's overall influence on the global economy and markets, we are being proactive in assessing the situation.
In particular, our focus areas right now are:
- Credit markets for signs of increasing risks to the economy and higher probability of recession.
- Policymaker actions, especially the response by Beijing as the situation escalates before it gets better.
- Company actions as they issue guidance regarding their exposure to the situation along with ongoing earnings announcements.
- Market contagion as the impact has mostly been contained in Chinese markets.
- High frequency economic data and surveys for signs of change in what was an improving economic story to start the year.
Keeping risks low in your portfolio
Based on our earlier assessment of the business cycle, our portfolios are already positioned to keep risks low, with a tactical underweight in emerging markets and in other Asian developed markets like Hong Kong and Japan. Going forward we continue to have the appropriate tools on hand should we need to respond to the latest developments.
Should you have any questions about your portfolios and how global events like the coronavirus outbreak can impact your investments, please contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).
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