BMO Family Office
“In God we trust. All others must provide data.”
Dr. William Schaffner, Vanderbilt University Medical Center, as quoted in The New York Times on 02/02/2020
Developments of the past two weeks regarding the new strain of coronavirus – labeled “2019-nCoV” – have progressed at a rapid pace. What began as an outbreak in Wuhan, China (population 11 million) has spread throughout the country and also to 23 other countries.1 On January 19, there were 282 confirmed cases (of which 278 were in China) and 3 deaths. A mere week later, confirmed cases shot up to 2,800 and deaths totaled 80, and two weeks later (Feb. 2), confirmed cases stood at 17,388 and deaths at 362.2 After initially demurring, the World Health Organization (WHO) officially deemed the outbreak a “Public Health Emergency of International Concern” (PHEIC) on January 30. Before we peel the multiple layers of uncertainty posed by the current outbreak, we express our deep sympathy to all of those affected.
The dramatic numbers referenced above have been met with dramatic action on the part of governments around the world. China has put Wuhan and surrounding cities under quarantine order (starting January 23), closed schools, and limited public activities across the country. The U.S. and several other countries have enacted tight restrictions on travelers coming from China, and hundreds of health care workers have gone on strike in Hong Kong demanding full border closure with Mainland China. Fear is in the air, and is abetted by the ongoing uncertainty surrounding the outbreak.
The current list of unknowns includes the severity of the outbreak in China, the ease of contagion, the incubation period, the mortality rate, and whether asymptomatic carriers can infect others. It’s a daunting list of question marks. While the numbers above represent officially confirmed cases, there are reports of widespread test kit shortages in China preventing case confirmation,3 and statistical modeling has pointed to the possibility of confirmed cases grossly underestimating the actual number of cases.4 China’s National Health Commission (NHC) reports an additional 21,558 “suspected” cases.5
The WHO estimates the “reproductive number” for the virus (i.e., the number of new cases that each case generates in a susceptible population) to be between 1.4 and 2.5. Other estimates are on the high end of that range or above it,6 and even small variations would have a considerable effect on the number of cases that actually exists. For comparison, the seasonal flu has a reproductive number around 1.3.7 The incubation period of the coronavirus is similarly difficult to pin down, with the WHO indicating 2 to 11 days,8 the U.S. Centers for Disease Control and Prevention indicating 2 to 14 days,9 and China’s NHC indicating generally 3 to 7 days.10 The mortality rate is believed to be around 2%, which is considerably higher than the season flu at 0.13%,11 but considerably lower than that of SARS at over 9%.
Given the incubation period, the “true” data would only recently begin to show the positive impact of the quarantine and other countermeasures in China. The reported data of confirmed cases, however, can still be heavily influenced by factors such as the alleviation of test kit shortages, so the virus’ effective reproduction amid widespread preventative measures remains difficult to determine at present. On an encouraging note, international cases outside of China have not exploded and early vigilance appears to be limiting transmission. In China, provinces other than the main outbreak area constitute about one-third of the total confirmed cases. In those areas, recent days have seen a small slowdown in the rate of increase in confirmed cases – still too early to call it a trend, but better than having data point in the wrong direction.
Financial markets will be looking for any indication that the peak of the outbreak is on the horizon. The risk of a global growth slowdown has increased and the situation is very fluid with a lot of unknowns. Emerging market economies (including China) are on the front lines of the threat, and the Shanghai Composite Index is currently down over 7% on the day after having been closed since January 24 for the Lunar New Year holiday. U.S. and other international equity markets have also weakened over the past two weeks, and some retracement of the strong gains seen since the fall of 2019 is to be expected when a new and unforeseen risk emerges so abruptly.
So where do we go from here? Business activity is clearly slowing in China as a result of the outbreak and unprecedented measures to combat the virus. Many Chinese companies have scaled back operations, as have major U.S. companies doing business in China such as Starbuck’s, McDonalds, GM, and Apple. Compounding the unknowns surrounding the outbreak’s trajectory is how quickly the Chinese economy can bounce back once this shock recedes. At that time, China will likely implement stimulus measures to kick-start economic momentum (including a 20B+ liquidity injection announced over the weekend). Where the line crosses from significant but temporary disruption to more long-lasting damage is not perfectly clear and is partially dependent on the ultimate duration of the outbreak.
As of now, economists are sharply cutting China growth forecasts for Q1, but generally expecting a rebound in Q2. These developments would be a headwind for global prospects, but not completely destabilizing. If past history is a guide, the crisis will only subside when the true number of new cases trends down and the spread of the virus across China shows signs of decelerating. Until then, volatility will likely persist. Despite this expected near term choppiness, we remain comfortable with our current pro-risk positioning that is tilted toward U.S. equities. Of course we will be monitoring the situation closely, and will adjust accordingly should the facts change.
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