HEALTH CRISES, THE ECONOMY AND THE MARKETS - HOUSE VIEW FEBRUARY 2020 - Banca March
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HOUSE VIEW FEBRUARY 2020 HEALTH CRISES, THE ECONOMY AND THE MARKETS
HOUSE VIEW. FEBRUARY 2020 HEALTH CRISES, THE ECONOMY AND THE MARKETS A little over a century since the Spanish flu pandemic killed over 50 million people, the swift transmission of the Wuhan coronavirus has sparked widespread fear of the unknown and of the potential consequences this health scare could unleash. The world today may be a very different place, but the unprecedented decision by the Chinese government to isolate the region of Hubei to stem the spread of the virus – coinciding with the new lunar year celebrations, when almost 3 billion journeys take place – fuelled the initial panic. Whether it was carefully considered or forced, after an initial period of concealment, negation and lies (like on other occasions), this was the right decision, and was taken at a crucial time. Especially given the fact that, in 1918 for example, just a few months before the end of the First World War, the main reason why the Spanish flu spread so far was the constant deployment of troops. The lack of hygiene in the trenches was another reason, as depicted in the film “1917”, winner of two Golden Globes and 3 Oscars; incidentally, Banca March and its customers invested in the film through a joint investment project of which we are immensely proud, but that’s a story for another time. The pandemic, which was in fact not Spanish at all, was given the misnomer because Spain – which had stayed neutral in the war – was the first to report the news, whereas other countries censored it to avoid demoralising their armies. That virus, which infected a third of the global population in under a year and a half, ended up killing 5% of the earth’s inhabitants. And it didn’t just hit the weaker members of society, like children and the elderly; it affected every age range and every social group. In fact, even well-known personalities like the artist Edvard Munch, the German Emperor Wilhelm II and Spanish King Alfonso XIII were infected with the virus. 2019-nCoV is not the first health crisis in recent years; in fact, it’s not even the first coronavirus. Some of the main examples from the last 20 years are Severe Acute Respiratory Syndrome (SARS) in 2002 which originated in China and spread to Hong Kong and Vietnam, Swine Flu in 2009, Middle East Respiratory Syndrome (MERS) in 2013, located mainly in the Middle East and Korea, and the multiple episodes of bird flu. The objective facts are as follows: the new coronavirus has an incubation period of up to two weeks, it is highly contagious and can be transmitted even before the infected person is symptomatic and, to date, it has infected five times more people that SARS did in total. It has a mortality rate of around 2.2%, far below the 9.6% rate for SARS or the 39.2% rate for bird flu. HEALTH CRISES, THE ECONOMY AND THE MARKETS 2
HOUSE VIEW. FEBRUARY 2020
Past health crises have taught us that, within the chaos and human tragedy that these situations entail, the
effects tend to be temporary and focused on the areas in which the virus spreads. There are also certain patterns
that tend to be repeated:
• Widespread paralysis, fear, closure of borders and traffic restrictions cause confidence and spending
to plummet. Once again, the latest data out of China points to a 70% year-on-year drop in passenger
transport, a 50% drop in sea transport, an 80% drop in hotel bookings and sales of luxury items and a
20% drop in demand for oil. Tourism accounts for 6.5% of the country’s GDP, and 85% of that corresponds
to the domestic market, which means that in the short term, the economy will be hit harder.
• As the virus is increasingly contained, only the affected regions feel a significant impact. Hubei, which
has been sealed off, accounts for 5% of China’s GDP and 96% of deaths from 2019-nCoV. For now,
contagion of the virus beyond Chinese borders has been very limited (232 cases, with a single death in
the Philippines). It is fair to say that overseas, the situation is under control.
• Equity markets suffer initially, except in the case of MERS. SARS is perhaps the most comparable
situation to the virus we are currently facing, although 2019-nCoV has affected 5 times more people and
currently has a lower mortality rate (though this remains to be seen). Graph 1 shows the 10% drop in
the Asian market and global equities in the four months after the confirmation of the first case of the
coronavirus SARS.
1. EQUITY PERFORMANCE DURING THE SARS EPIDEMIC (2002-03)
Source: Bloomberg and Banca March
5 July 2003: WHO
16 Nov 2002: First case 12 March 2003: WHO declares end of epidemic
of SARS in Guandong issues global health warning
20 March 2003:
Invasion of Iraq
• Equities tend to bottom out when the rate of infections stabilises. The situation has now improved,
but the virus is still far from under control: New contagions of 2019-nCoV are increasing by 15% a day,
versus an average of 27% since the initial outbreak (40,600 people infected and 910 deaths at the date
of publication).
• Following the initial shock and collapse in retail sales, the economy and the market recover swiftly,
because the authorities are quick to launch bold stimulus measures to mitigate the plummeting
growth. After the outbreak of SARS in 2002-2003, the Chinese government announced an ambitious
infrastructure plan to offset the 2% drop in GDP in Q2 2003. Since last Monday, the People’s Bank of
China has injected $21 billion dollars and cut the loan rate by 10 basis points. Meanwhile, the government
has cut VAT and, in line with the trade deal reached with the US, has announced that it is slashing tariffs
on products worth 75 billion dollars. We expect to see further measures, and it is quite possible that
the government will allow its deficit to exceed 3% of GDP to buoy the economy in the second quarter.
HEALTH CRISES, THE ECONOMY AND THE MARKETS 3HOUSE VIEW. FEBRUARY 2020
2. CHINA: GDP AND PERFORMANCE BY COMPONENTS
Source: Bloomberg and Banca March
15
12,5
10
7,5
5
75%
56%
2,5
36%
0
-2,5
-5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Consumo Inversión Exportaciones Netas PIB Interanual Contribución al PIB (% Total)
Having identified the patterns in past performance, it is important to highlight that in recent years, the relative
weight of China in the global economy has increased dramatically. It now accounts for 19% of global GDP, versus
8% in 2002 when SARS broke out. Also, as graph 3 reveals, China’s economic structure relies heavily on private
consumption, which has increased from contributing 56% of GDP growth in 2002 to 75% today. This situation,
coupled with a more mature economic cycle than back then, places the rest of the world in a position of greater
weakness and dependence if China does not return to normality relatively quickly.
As explained in the macro section, it looks likely that we will not see an upturn in Chinese economic activity until
at least the second quarter of the year, forcing us to downgrade our 5.8% GDP growth forecast, which already
factored in a slowdown from the 6.1% registered in 2019. Depending on the duration of the virus, the impact to
the downside could range from -0.3% to -0.5% of GDP.
The factors outlined above show that we need to channel our efforts into monitoring the speed at which the
rate of new infections begins to slow, as this will determine the speed at which the current obstruction to the
economy will lift and allow the situation to return to normal. However, despite the downside risks to growth,
we still believe that the fundamentals of the equity markets are solid, thanks to the actions taken by central
banks; it is therefore worth looking at this very sad situation as a new opportunity to continue buying risk during
any potential episodes of volatility over the days ahead. The German philosopher Max Weber, who died of the
Spanish flu, defined the State as having a monopoly over violence1. The images coming out of China showing
infected people dragged from their homes are pure, unadulterated Weber. A high price befitting a medieval
society... in the interests of the common good?
Joan Bonet Majó
Chief Investment Strategist
1 Weber, Max. Politics as a Vocation (1919) in The Politician and the Scientist.
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