Now that the first death from the 2019-nCoV strain of coronavirus has happened outside China the simmering global anxiety may well turn to panic.
In slightly more than a month – the World Health Organization’s China office first heard on December 31 reports of a previously-unknown virus infecting people in Wuhan, eastern China – the infection has spread around the globe.
With this event there’s little guidance to be had from any economics. It’s all about the severity and duration of the epidemic, and how far the consequent panic might carry over into a sell-off of equities, commodities, and even real estate.
Trying to assess what might happen to asset prices is a bit like trying to juggle with too many butcher’s knives – watch out for the blood.
But panics carry within them investment opportunities. Investors need to keep watch for “peak panic”, the moment when panic starts to subside and buying opportunities emerge – which could be a while.
Three Second Summary
The 2019-nCoV strain of coronavirus will dent china’s short-term agricommodity demand but the virus is not the ‘big one’ feared by health professionals. Demand will rebound. Watch out for peak panic as buying opportunities will then emerge. longer-term watch out for china’s peak population which is five years away. Demand for agricommodities will then change and western-style diets will become more popular.
Lessons from Sars
Do previous similar viral outbreaks hold any lessons?
The closest prior example to this outbreak is the Sars (severe acute respiratory syndrome) virus, which raged for nine months during 2002-03.
Sars also originated in China, spread to more than 20 countries, infected more than 8,000 people, and had a 9.6% fatality rate, according to the World Health Organization.
The Sars epidemic most seriously affected Asia’s air travel, tourism, and domestic demand.
According to official figures, China’s economic growth fell from 11.1% in the first quarter of 2003 to 9.1% in the second quarter, but recovered to 10% in the third quarter 2003.
Yet in 2003, China’s GDP was a mere 4% of the global total.
Today it is 17%, and so the repercussions will be proportionately bigger.
To date, the 2019-nCoV coronavirus has infected more than 14,000 with 300 deaths – so its death rate, of around 2%, is much lower than Sars, but its infection rate is much higher.
If the world has reacted fast enough and with sufficient determination – which we will only be able to start assessing in another month – then the spread of the coronavirus outside China and its neighbouring countries may be limited, and Sars may prove a reliable guide as to the fall-outs.
Oil market clues
In China the impact of the current virus has been muted.
China is the world’s biggest oil importer and the second-largest refiner - the clampdown on travel inside the country has pushed international oil prices to three-month lows and the benchmark Asian gasoline price fell the most in four years last week.
Wood Mackenzie, the energy consultancy, estimates that China’s crude oil demand could be reduced by 250,000 barrels a day for the first quarter of 2020.
The Chinese ministry of transport says that travel during the lunar new year, when millions of Chinese criss-cross the country, has been down by almost 30% compared to last year.
Last year, Chinese consumers spent nearly $150bn in just the first week of the new year.
So a crude calculation is that Chinese new year celebrants may have spent at least $50bn less this year than last.
That’s a very big bowl of rice - but not so big it will stop China in its tracks.
The truth is that no-one can give reliably accurate figures for precisely how this epidemic will affect supply and demand.
Société Générale analysts have said it could prompt a 10% “correction” (ie fall) in global equities but that neatly rounded figure hints at this estimate being little more than guesswork.
What can be said is that economic activity – travel, shopping, eating out, spending, production – have all been hit in China.
Economic activity in other countries will also be knocked, but, equally obviously, much less than in China.
If the virus takes around two weeks to develop, then by the end of February it may well be starting to play itself out.
Until the rate of infection shows itself to be slowing then the demand for all commodities – oil, metals (except gold), agricommodities – has a big question mark next to it.
Nevertheless, although consumption of grains, meat, and dairy products – of which China has been a net importer in recent years – may be dented slightly over the next two months, they will bounce back.
The OECD projects, for example, that while rice will remain critical for China’s diet – accounting for 25% of calorific intake – by 2026 China’s meat and fish demand will have grown hugely, accounting for 220% and 180% growth respectively in calorific intake.
Maybe so. Yet by 2026 China will have reached its peak population, so demand growth is fast approaching a crunch - this has more serious longer-term implications for agricommodity prices than the current viral epidemic.
Not the ‘big one’
Serious though the coronavirus is, it’s not yet the ‘big one’ that health professionals fear, the kind of deadly pandemic such as the Spanish flu outbreak of 1918-1920.
That infected 500m and killed as many as 20%. Now that did dent demand.