Global markets hit hard as indices catch Wuhan flu
The outbreak of coronavirus is quickly unraveling gains made by global markets from the Us-china trade deal euphoria, with major indices trading 2-9 per cent lower than their mid-january peaks. The global market capitalisation has seen an erosion of $2.2 trillion in the last week of January.
Foreign brokerages are bracing for a larger impact on the global markets than what was during the SARS outbreak, which also originated in China, back in 2003.
“We expect a bigger and possibly longer macro impact on Asia than what was seen during SARS. Our base case is that 12 months from now, the Asian economy will be near where it would have been without the Wuhan virus, but we see a sizeable risk of a significantly worse outcome,” Credit Suisse said in a note.
Coronavirus has also been termed as the Wuhan virus, as it is believed to have originated from the animal and seafood market of the Chinese city. Before the outbreak became known, global markets had seen a sharp spurt after the first phase of the USChina trade deal was announced in midDecember. The rally had lifted some of the major global indices to fresh lifetime highs.
Dow Jones, Nasdaq, S&P 500, Nifty, Sensex and German DAX Index, had claimed fresh highs in January. Brokerages fear possibility of a more protracted outbreak. “SARS was basically a one-quarter event, as far as consumer and travel panic is concerned, but the Wuhan virus might hurt sentiment for a longer period. If mutation leads to a Spanish flu-style second wave, the impact on sentiment could prove prolonged,” analysts at Credit Suisse said.
So far, Asian indices have been worst hit. Hang Seng is down nine per cent from its mid-january peak, giving up most of the gains (11.5 per cent) it made on the back of the Us-china trade deal.
Among other Asian indices, Taiwan Taiex is down 6.2 per cent from this year's peak, South Korea’s Kospi is down 5.26 per cent, and China's Shanghai Composite is down 4.46 per cent. Domestic indices — Nifty and Sensex — are down 2.6 per cent and 2.5 per cent, respectively.
Market experts say that India may be among Asian countries which could see lesser impact from the outbreak because of its low connectivity with China. However, they caution that highly bureaucratic structures could hamper the government's ability to fight the disease outbreak. Analysts say the outbreak is likely to have a wider global impact, as China's linkage to global trade has grown significantly.
“...While the impact is once again likely to be concentrated on Asian consumption (travel will be hard hit), the increased importance of the Chinese economy suggests a bigger global drag,” Macquaire said in a note. “As China has become an integral part of the global supply chain, any further extension of factory closures would raise risks of temporary supply chain disruptions for multinational companies,” Franklin Templeton EM Equity said in its note. The latest estimate from The Economist Intelligence Unit (EIU) shows that a virus of Sars-like proportion could reduce China’s real GDP growth in 2020 by 0.5-1.5 percentage points against EIU’S baseline forecast of 5.9 per cent in 2020. Further, the assessment showed that a drop of 1.5 percentage points in China’s growth could lead to a 0.2-0.3 percentage points hit on global growth, without factoring in for the potential impact on other Asian economies.