Coronavirus: the economic impact

As an economics graduate that gave up studying Chemistry and Biology before the age of 16, there is very little from a medical standpoint that I can add to what is already available on the Coronavirus.

by James Godrich

Fund Manager

In fact, whilst doctors, pathologists and epidemiologists struggle to estimate how the virus will develop, change and mutate, I would be wary of any economist or investor that tries to do just that.

But what we can do is use the facts and the data available at the moment to analyse the expected impact on the global economy and hence the market reaction. To that extent, it is useful to understand that the Coronavirus is supposedly similar to the SARS virus that caused 349 deaths in China in 2003. The main difference is that Coronavirus is believed to be more virulent but less deadly than SARS.

Crudely speaking, it is therefore worth looking at the impact to markets during this episode. When this was reported, the MSCI Pacific ex Japan index fell by 12% in the following 6 weeks but then ended the year up 42.5%. Furthermore, it is useful to note that the market bottomed at the point when reported new cases stabilised.

As we write, fear is the dominant emotion in the markets as investors worry about the economic impact of temporary factory closures, shut downs of major cities and the resulting economic slowdown. What gives us comfort is that most academic research shows that consumption and production lost during an epidemic are later made up.

Whilst a number of factors are different this time around, investors might be advised to listen to Mark Twain; “history doesn’t repeat itself but it often rhymes”.

Understanding Finance

Helping clients understand what we do is key to building relationships. To explain some of the industry jargon that creeps into our world, we’ve pulled together a section of our site to help.