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By Patricia Ribeiro & Nathan Chaudoin - Updated February 5, 2020
The markets found their way back into the green this week after last week's coronavirus uncertainty. Part of the change in market sentiment was in response to China's efforts to contain the outbreak and support the yuan. Concerns of a global pandemic also appear to be easing up. The number of confirmed new cases continues to grow in China. Yet, the mortality rate seems to be holding steady at about 2%.1 That's significantly below the SARS mortality rate of nearly 10%, even though the coronavirus has infected more people.
The People's Bank of China (PBOC) injected a large amount of liquidity this week to support financial markets and investor confidence. This move added to efforts by the Chinese government to contain the virus through travel restrictions and extended holiday seasons. In general, the government has been a lot more proactive and transparent compared to the SARS outbreak in the early 2000s.
With the number of recovered people surpassing the death toll last Friday, it also appears that treatments are working. According to The New York Times , "the number of suspected cases has dropped for two days in a row."2 This is positive news for jittery markets.
In our view, it's too early to draw conclusions about the long-term impact of the coronavirus. Experts still do not have enough data to determine how lethal the virus really is. This week's global data was quite strong and supportive, but it did not include the impact of the coronavirus. The measures China took to contain the virus will have effects on manufacturing and consumer data. We expect a manageable weakness due to the holiday shutdowns resulting in lost manufacturing days and decreased retail and consumption sales.
There is a risk that the outbreak lasts into the second quarter, materially impacting Chinese gross domestic product (GDP) expectations. However, we believe the current trend in suspected new cases—especially internationally—is showing early signs of containment. If Beijing successfully contains the virus and consumer confidence returns to a positive trajectory, we believe the economic hit will be limited to the first quarter. Normal rates of manufacturing and consumption may resume and, paired with policy support, could spur an economic recovery in the second quarter. As such, we currently don't see a need to make significant changes to our portfolios. We continue to believe China is moving to a more consumption-driven economy in the long term, supported by the rise of services and technological production upgrades.
At this point, it is hard to call the bottom without more information about the virus. The next few weeks will be important. However, today, we believe the market may come back sooner rather than later as it has during past periods of external shocks.
1 As of February 5, 2020. Source: Coronavirus 2019-nCoV Global Cases by John Hopkins CSSE .
2 As of February 5, 2020.
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