The Coronavirus Effect

The Coronavirus Effect

about 4 years ago3 mins

Mentioned in story

With the spread of the coronavirus taking the world by storm, investors initially caught the selling bug. Fortunately, their stock-buying habits have since begun to recover. Achoo.

🕰️ Recap

  • In late January, investors started selling off stocks globally as the coronavirus spread beyond China
  • On Monday, Chinese stock markets reopened after an extended Lunar New Year break – and shares fell 8%
  • And on Tuesday, the world’s largest oil producers met to discuss cutting output as they try to stem the commodity’s falling price

🔗 Connecting The Dots

Ever since the coronavirus gained global notoriety last month, China's government has revealed thousands have been infected and hundreds have died. With millions of people traveling into and out of China for Lunar New Year celebrations, the virus spread more quickly than it otherwise might’ve done: cases have been reported in the US, the UK, and across Europe.

People and companies across China – particularly in the most affected regions – slowed or completely stopped their comings and goings. In Wuhan, for instance, car manufacturers including Honda and Groupe PSA (maker of Peugeot cars) hit pause on their operations, while public hotspots like Starbucks, McDonald’s, and Disneyland all closed their doors.

The consequences are far-reaching: on the one hand, shut businesses mean lower economic activity and growth – a worrying prospect for China, given that it’s already at its lowest growth rate in decades. On the other, companies like airlines (which have halted flights to China) or retailers (which might struggle to restock their shelves) are now likely to suffer lower earnings. And on the third hand, lower anticipated demand from companies and weaker economic growth has knocked demand for oil, whose price has dropped around 20% since the outbreak. That’s to say nothing of the people growing three hands round here...

While investors in the West sold off stocks, those in China couldn’t: an extended New Year’s break kept markets closed. So when they reopened this week, those stocks fell dramatically despite the government’s efforts to prop up the economy. Pretty soon, however, investors everywhere seemed to get used to elevated volatility levels, and US stocks hit new record highs. Again.

🥡 Takeaways

As the second-biggest economy in the world, China’s prospects impact every other major economy, so investors are closely watching what’ll happen next. They might be interested to know economists at TS Lombard expect to see a “V-shaped” bounceback recovery in China next quarter. That’d be a pretty positive outcome by all accounts: a “U-shaped” recovery would mean a slow pickup in growth, and a dreaded “L-shaped” one would mean no pickup whatsoever.

Some stock market investors were trying to find a silver lining around the cloud: they bought up companies that make medical devices like face masks, which should benefit from a surge in demand. That also points to investors’ broadening interest in sustainable investing. With environmental and health-related “black swan events” appearing more and more frequently, investors are increasingly asking companies to help fix things – or at least not make them any worse. And after last year’s record levels of investment into sustainable funds, the world’s largest asset manager, BlackRock, is doubling down on sustainability too.

🎯 Also On Our Radar

Earlier this week, news broke that Intercontinental Exchange (ICE) – owner of the New York Stock Exchange – was considering a takeover offer for ecommerce marketplace eBay. While eBay’s stock initially rose in reaction to the potential of a decent windfall for its investors, ICE’s fell. Its investors reportedly struggled to see the rationale for bolting a retail marketplace onto one focused on trading financial products, and worried it’d be a waste of money. So when ICE announced on Thursday that it was no longer interested in coupling up with eBay, its stock bounced back.

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