The markets have at long last begun to be concerned about the virus. Should we be?
Ignoring for the moment the accuracy of data from China and many other parts of the world, the news from Korea and Italy in particular are an indication that the virus has not been contained in China.
That in itself would be problematical in the short term as large parts of industrial China (Wuhan – think Birmingham population times 10!) have been closed down for the best part of a month. The Chinese authorities are now encouraging workers to return to their factories, but the dislocation of supply chains will take some time to be restored even if full production is resumed immediately which looks very unlikely. The “forced” return to work may just make the spread of the virus more problematical.
Now we have schools closed in Milan, trains halted on the Austrian border, the Venice festival cancelled and the Emperor of Japan hoping the same fate wont befall the Tokyo Olympics. The potential for economic dislocation is not insignificant.
We have yet to see what the response will be from the central bankers. They have all made encouraging noises and until today the markets believed that action would be forthcoming plus fiscal stimulus from government. If that does in fact transpire and the virus does not become more virulent and warmer spring weather reduces its ability to spread then we will have had a significant economic stimulus and markets could recover quite quickly.
As yet we don’t have enough reliable information to know just how “deadly” the virus will be in terms of human lives and economic fallout and we could argue that valuations were getting very rich and a correction is in fact very healthy. Checking exposure to the travel and entertainment sectors which will suffer a significant downturn plus US manufacturers in particular with Chinese supply chains that were not re-routed when the trade wars started to have an effect. There is a potential inflationary kicker to what to all intents and purposes is a deflationary event; ie supply chain shortages will result in higher prices which is one reason for gold rising and confirmation that it is a great portfolio diversifier.
More anon as things unfold.