February 3, 2020
In this introductory journal, I share observations regarding what we know about the Coronavirus and the impact on China and beyond.
According to the Center for Disease Control the “2019 Novel Coronavirus (2019-nCoV)” is a virus (more specifically, a coronavirus) identified as the cause of an outbreak of respiratory illness first detected in Wuhan, China. Early on, many of the patients in the outbreak in Wuhan, China reportedly had some link to a large seafood and animal market, suggesting animal-to-person spread. However, a growing number of patients reportedly have not had exposure to animal markets, indicating person-to-person spread is occurring. At this time, it’s unclear how easily or sustainably this virus is spreading between people.” Center for Disease Control (CDC.gov).
The Good
According to the latest numbers provided, the mortality rate associated with the virus is substantially lower than outbreaks associated with other viruses. This morning CNBC reported that “As of Sunday February 2, 2020, China’s National Health Commission said there were an additional 57 deaths and 2,829 new confirmed cases. That brings the country’s total to 361 deaths and 17,205 confirmed cases.”[1] This translates to a mortality rate of approximately 2%. To provide context, the Sudden Acute Respiratory Syndrome (“SARS”) in 2002-2003 had a mortality rate of 9-11%. Middle Eastern Respiratory Syndrome (“MERS”) has had a mortality rate of 45%. Influenza A subtype H5N1 had a mortality rate of 60%. Fortunately, illness related to SARS, MERS and H5N1 have been far less prevalent. For example, there were slightly in excess of 8000 cases of SARS from 2002-2003. The incidence of MERS is even lower with less than 2500 cases having been reported since 2012.
The Bad
As noted above, although early on it appeared that the virus seemed to result from animal to person contact, many of the people who have contracted the virus have not had direct contact with animals and this would suggest that it is spreading from person to person contact. As reported in the Wall Street Journal (“WSJ”) on February 2, 2020 in the article entitled What to Know About the New Chinese Coronavirus, “as health authorities race to control the outbreak, they are also scrambling to figure out, based on imperfect data, how the virus is transmitted, the length of the incubation period and the degree to which people without symptoms can spread the disease. China’s health commission says incubation is generally between three and seven days, with the longest period being 14 days, and that people can spread the virus before appearing ill. That makes a two-week quarantine an important prevention measure – and casts doubt on the efficacy of temperature checks, the main screening method at immigration and other checkpoints.”
What is a little more disconcerting is the suggestion in the same WSJ article by Jonathan Read that “We think only 1 in 20 people who are getting infected are actually being diagnosed” in Wuhan. Dr. Read, is a lead author of a study from Britain’s Lancaster University that put Wuhan numbers in the tens of thousands as of Jan. 22. He went on to say that “it’s quite a bit more transmissible than seasonal flu.”
The WSJ article stated that “several recent studies published by scientists estimate that each person infected will, on average, infect two to three others. Epidemiologists call that the reproduction number. A reproduction number over 2 suggests an epidemic will expand rapidly, while below 1 suggests the problem is dwindling. Estimates of the reproduction number differ widely, with some studies using probability models and others based on regression analysis of cases over different time periods. Christian L. Althaus, an epidemiologist at the University of Bern in Switzerland, estimates that the basic reproduction number of the virus is 2.2. According to Dr. Althaus “there is a potential threat of a global pandemic if this reproduction number cannot be reduced.”
The Ugly[2]
As of February 3rd, according to CNBC at least 24 provinces, municipalities and other regions in China have told businesses not to resume work before February 10th at the earliest. To put this in context, hundreds of millions of people live in the areas that are affected by these closings. Last year, those parts of China accounted for more than 80% of national GDP. The people impacted by this is more than the total population of the United States!
Depending upon the progression of the Coronavirus outbreak and the consequent response by the Chinese government and other countries will dictate how big of an impact this will have on the global economy. China is the 2nd largest economy in the world and currently represents approximately 16% of world GDP. The implications for a sustained shut in and shut down of large parts of the Chinese economy not only has potential significant implications for the Chinese people directly impacted but also for all of us.
What to do
First, don’t panic! From a physical health perspective, if you are not traveling to the Far East and are not otherwise immunocompromised, this should not factor prominently amongst your concerns. From a mental health perspective, it is easy to become overwhelmed with the plethora of reports regarding the outbreak. The Coronavirus outbreak and response has been accompanied by what the World Health Organization (“WHO”) has characterized as a massive ‘infodemic’ – an over-abundance of information – some accurate and some not. This makes it hard for people to find trustworthy sources and reliable guidance when they need it. For those who want to keep up to date on the progression of the disease, we recommend the WHO’s website, Who.int. More specifically, WHO has been issuing regular updates on the outbreak. These reports are referred to as Situation Reports. The latest one published is Situation Report – 13 with data as of February 2, 2020. By limiting yourself to WHO updates, you will be able to manage your exposure to the amount of sensationalized, hyped news on this subject.
Second, as it relates to your investment portfolio, we would caution against trying to “trade” this event. While we can certainly identify regions, sectors, and supply chains that will be impacted by the Coronavirus, there is a high potential to be whipsawed by making significant bets in your portfolio. How this will ultimately impact the capital markets will be dictated by several factors including the duration and severity of the outbreak as well as the policy response by governments throughout the globe. For example, it is entirely likely that there will be substantial economic stimulus introduced by the Chinese government particularly if it believes that the Coronavirus will damage China’s economy. In fact, today, China’s central bank announced it will inject significant additional liquidity into the financial markets (equivalent of $174 billion). To the extent that Coronavirus is temporary, containable and reversible will determine global policy response. Depending upon the severity of this event, an economic headwind for the rest of the globe may result in potential accommodative monetary and other stimulative policies being introduced to counteract the impact of the outbreak. These policy responses could in turn provoke significant relief rallies that would in turn undercut tactical portfolio strategies aimed and capitalizing on short term market dislocations.
As part of our portfolio construction process, we develop recommendations that tailor the level of equity (international and domestic) and other asset classes to the risk tolerance and timeline for the applicable client. With that said we anticipate additional near-term volatility as this situation progresses.
Please contact us if you have any concerns regarding how your portfolio is currently invested.