February 24, 2020
Update on Coronavirus Outbreak
On January 27, we published a note sharing our perspective on the coronavirus outbreak. While our views are largely unchanged, we felt it was important to provide an update as the issue continues to evolve.
Status of the Outbreak:
The coronavirus (COVID-19) manifests as a pneumonia-like illness resistant to standard treatments, and is believed to have originated in the city of Wuhan located in the Hubei province in central China. As of this writing, there have been approximately 64,500 confirmed cases worldwide with a death toll approaching 1,400. The vast majority of those cases (63,800) are in China, with a small number reported elsewhere including 15 in the United States. On January 30, the World Health Organization (WHO) declared the virus a global health emergency – a designation that enables international coordination of containment efforts. In addition, travel restrictions have been imposed by more than 50 countries in an attempt to limit spread of the illness.
The number of new coronavirus cases appeared to be stabilizing until Thursday February 13, when Chinese officials revised the methodology for counting infections. The change added nearly 15,000 confirmed cases to the total in a single-day renewing fears that the scale of the outbreak could be more severe than previously envisaged. Importantly, the increase did not represent a sudden surge in new infections, rather inclusion of cases previously diagnosed through clinical symptoms, but without a positive diagnostic test. To date, the death rate has held steady around 2% – much lower than SARS (~11%) and the ebolavirus (~50%).
Economic Impact:
In addition to the humanitarian toll, the coronavirus will inflict some level of damage to the global economy. It is unclear whether we are closer to the beginning or the end of the outbreak, which makes it difficult to pinpoint how severe the economic impact will ultimately be. In the U.S., White House economists still see a very limited economic impact domestically from the outbreak. The virus remains concentrated in China, as do first order economic disruptions resulting from quarantined populations, business and factory closures, and reduced travel and tourism.
Consensus forecasts for China’s 2020 GDP growth started the year at 5.9%, but have fallen to 5.5% year-to-date (among analysts who have published updated forecasts). The expected reduction to full year growth generally assumes more meaningful impact in the first quarter and normalization in the second or third quarters. China represents approximately 17% of global GDP so, all else equal, a 0.25%-0.50% hit to China’s GDP growth could reduce global GDP growth by roughly 0.05%-0.10%. Unfortunately, all else is not equal as the global supply chain and China’s trading partners will also be impacted, albeit to a lesser degree. Consensus estimates for global GDP growth in 2020 have come down approximately 0.15% year-to-date, which seems reasonable, though we acknowledge a wide range of potential outcomes.
Market Impact:
We expect the economic impact related to the coronavirus will only be a temporary disruption and financial markets appear to share our view, for now. Following an initial flight to safety in late January, global equities have rallied with U.S. stocks capturing new highs in February. It appears investors are increasingly comfortable looking beyond transitory economic headwinds, though the risk of a deteriorating narrative remains. Intermediate-to-longer term market implications will depend heavily on how the situation unfolds in coming weeks and months.
We will continue to monitor developments and communicate our views. In the meantime, keep in mind that your financial plan, and the investment portfolio supporting that plan, were developed with a long-term lens and maintaining discipline during periods of uncertainty is the most reliable course for growing and preserving wealth. Please contact any member of our team if you have questions.
Sources: Bloomberg, LP; World Health Organization; National Health Commission of the People’s Republic of China