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What might be the economic impact of the coronavirus?

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What might be the economic impact of the coronavirus?

The coronavirus that originated in China recently has had a devastating human impact. It is unclear how much more widespread the infections and deaths will become. We can only hope that the Chinese government’s significant efforts to contain the virus will prove successful.

From an economic perspective, there are some high-level numbers that might assist investors in grappling with the economic impact of the coronavirus. Let’s start with Hubei province. This is the epicentre of the virus with around 20,000 cases confirmed at the time of writing. It is also home to the city of Wuhan – with a population of more than 11 million – which is in complete lock-down. Hubei accounts for around 5 per cent of Chinese GDP.

There are then another seven provinces that have collectively confirmed around 5,000 cases of the coronavirus – with cases growing by the day. These seven provinces account for around 34 per cent of Chinese GDP. Many believe these eight provinces, accounting for nearly 40 per cent of Chinese GDP or nearly 4x the entire GDP of Australia, could well remained closed for another week, with Hubei remaining closed until the end of the month.

This would most likely be enough to push the Chinese economy into a Q1 recession. Furthermore, these affected provinces are critical elements to many global supply chains. Extended closures could affect such global industries as: mobile phones, apparel and footwear and furniture.

While these disruptions will likely be temporary, the Q1 effect could be significant. And there is a possible scenario, though lower probability, in which the coronavirus is worse than expected. And under this scenario, the economic impact, both in China and around the world, would also be significantly worse than expected.

In our global portfolios, we substantially cut Chinese earnings exposure from our portfolios in January. We fully expect this reduction in exposure to be temporary and will look to reload our positions when we have confidence the coronavirus is contained. We prefer to reduce the risk to our portfolios in this way, rather than to simply hold on and hope for the best. Though we are also hoping for the best.

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Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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8 Comments

  1. Today the expert flying to Geneva for the WHO expert meeting expressed his opinions which mirrored everything I have said over the last 2 weeks

    https://www.theguardian.com/world/2020/feb/11/coronavirus-expert-warns-infection-could-reach-60-of-worlds-population

    I realise it is all very sombre.

    Today I will be initiating a campaign with a petition to sign expressing solidarity with all of humanity – “Je suis Chinois”

    I will provide the link here and I would appreciate as much support as possible – if someone can get one of those hashtag thingys going that would be great… I don’t tweet myself

    From now on I will only share my views on the Coronavirus outbreak, its implications for people and investing, and personal advice on preparing for the outbreak, to those who sign the petition and provide an email address.

    I am for a united humanity!

    Are you?

  2. Hi Andrew
    I’m amazed at how share prices are reacting, not complaining mind you as the portfolio is increasing nicely but amazed nonetheless and waiting for the crash to arrive. Surely Apple, to name but one, must have supply shortages coming soon if the China factories are closed? No products = no sales = earnings miss – or am I missing something?

      • Andrew, Tim it would be interesting to think through which industries most and least effected by labor shortages and which have vulnerable supply chains. Also what is going to happen if people become mostly home bound. I can’t think of any upsides except for medical supplies, canned foods, packaging companies like PGH (I can’t see that people will be allowed to pick their own veggies at the supermarket, and suburban (as opposed to apartment homes). It would be interesting to ‘wargame’ a pandemic scenario.

  3. Strange times Andrew..

    The Shanghai index has been rising over the last 5 days. Dow is mostly up.

    3M (sells protective equipment) is low over the month.

    Airbus steady over month

    Alibaba slightly down over last 5 days (maybe it should have taken a bigger hit)

    Also…

    “there is a possible scenario, though lower probability, in which the coronavirus is worse than expected.”

    The risk that Coronavirus (and the crisis associated with it) may substantially disrupt markets is steadily increasing

    ‘We prefer to reduce the risk to our portfolios’ – especially because the cost in doing so is minimal and the potential risks are substantial.

  4. Below the full detail of what is being reported in the press today (From the Imperial College London, the WHO collaborating centre for infectious disease modelling)… see MacroEdgo.com for more discussion on these and other developments…

    “For cases detected in Hubei, we estimate the CFR (case fatality ratio) to be 18% (95% credible interval: 11%-81%). For cases detected in travellers outside mainland China, we obtain central estimates of the CFR in the range 1.2-5.6% depending on the statistical methods, with substantial uncertainty around these central values. Using estimates of underlying infection prevalence in Wuhan at the end of January derived from testing of passengers on repatriation flights to Japan and Germany, we adjusted the estimates of CFR from either the early epidemic in Hubei Province, or from cases reported outside mainland China, to obtain estimates of the overall CFR in all infections (asymptomatic or symptomatic) of approximately 1% (95% confidence interval 0.5%-4%)… All CFR estimates should be viewed cautiously at the current time as the sensitivity of surveillance of both deaths and cases in mainland China is unclear. Furthermore, all estimates rely on limited data on the typical time intervals from symptom onset to death or recovery which influences the CFR estimates.”

  5. Do you really believe what the Chinese Government is telling us ? Probably the extent of the virus is FAR greater than what they are letting on; for example, building a hospital within 10 days is one thing, but having all of the steel, cement, workers, machines lined up etc. all ready to go makes me think that perhaps, they had known about it in advance and just didn’t let on until they chose to. China is very good at censorship, so why should this be any different ?

    And I certainly don’t believe that the doctor (Li Wenliang) who discovered it just happened to die from it, it’s all a bit too convenient, especially when his arrest was an embarrassment to the CCP. Millions may be demanding answers but they will never get them.

    China also doesn’t care about what it exports because once it leaves their country, it’s someone else’s problem; the open border to HKG has seen that place absolutely decimated in terms of trying to get basic face masks to protect against the virus, and supermarket shelves are empty thanks to the spread of the virus.

    This is just a parallel to all of those sub-standard building materials that supposedly aren’t inflammable or articles that don’t contain asbestos (like brake shoes, EPS building panels, cement boards, railway cars, even kids toy and crayons) that we import but then turn out to be full of the stuff. Just search “China Asbestos Australia”.

    Economically, they are also never going to admit they are in recession or have a serious debt problem – or any other problem for that matter – because that would mean “losing face”. Chinese GDP is what the CCP says it is.

    It’s all lies and there are far too many people who blindly believe the numbers and the rhetoric without questioning it.

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