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Impact of corona virus on economy

Mutual Fund Industry | March 02
One of the biggest human fears is that of mortality which is what makes us all sit up and notice in a horrified manner when an instance of global epidemic strikes us. Coronavirus is an instance of such a tragedy unfolding and taking our attention, economies and market by the horns. Is it bad? Most definitely. Is it bad enough the lead to the conclusion that the world is coming to an end be it with all global economies being in shambles or the need to look for doomsday bunkers to huddle in and hope for our lives to be saved? Not really. Let’s look at the situation rationally by breaking it down:

What is Coronavirus?

Coronoavirus or COVID-19 is a viral infection, first discovered in the Chinese city of Wuhan in late December 2019. Unlike what a lot of people are aware of, coronavirus is actually a family of viruses and the one making news is a new type called COVID-19 (although for simplicity, we will continue to refer to it as coronavirus in the rest of the article). What makes them particularly deadly is the twin fact of the speed with which it spreads and the respiratory infection that it can cause leading to deaths in it’s wake. The virus has a long incubation phase whereby the virus takes root in the host body before it starts showing recognizable symptoms. However, even during the incubation, it remains highly communicable through air. As for fatality, the virus does prove fatal for approximately 2% of the cases, with older people and those with prolonged illness proving to be more vulnerable to it.

What is the current spread of Coronavirus in the world?

Currently, China is the worst affected country accounting for approximately 97.5% of the deaths with a fatality toll of 2788 as on February 27, 2020. Iran currently has the second highest number of deaths at 26 with a very high mortality rate of more than 10%, probably suggesting the lack of adequate medical resources. Italy, a recently affected country has seen a very speedy escalation of the infection with 17 deaths whereas South Korea has also lost 13 of it’s citizens to the viral infection. 

The cruise ship Diamond Princess was also an unfortunate victim to the virus despite a 2 week quarantine, notching up 4 deaths. Japan, Hong Kong, France, Taiwan and Philippines all have single digit death tolls to their name. India is one of the long list of countries where cases have been reported, but thankfully have not seen any of those turn fatal.

While we don’t recommend it, in case you are keen to keep track, World O Meters has this interesting page to help keep you updated. 

Why are markets reacting negatively to Coronavirus? 

Before we come to the markets, sample some of the measures affected countries have been forced to take. China has quarantined the entire province of Hubei (capital of which is the epicenter Wuhan) as well as many other parts of the country, effectively ordering their citizens into house arrest. Many countries are no longer flying their commercial air operations to Mainland China and in some cases even Hongkong. Italy has quarantined 11 towns. Japan has ordered all their schools to be closed till April. Many countries have cancelled public gatherings, be it for Spring festival celebrations or any upcoming carnivals. Iran where the mortality rate has currently been an alarming 10% went to the extent of cancelling Friday prayers in Tehran and other cities to avoid public contact.

Considering this scenario, production and normal business is obviously hampered. Since the main country affected is China, which is also today the nerve centre and pulse of global business the impact is particularly hard. Oil prices have been dropping thanks to the lower demand from China on the back of muted production activities. The top 5 sectors to report losses at the equity markets in the recent past have been metals, auto, oil & gas, energy and power. Apart from this, banks are affected since the return on capital well depends on the economic activity. A lot of tech giants and pharmaceutical companies are looking at major supply constraints considering the manufacturing hub of the world is still struggling. Many south east Asian countries where tourism is the main stay, for instance Thailand and Vietnam, are struggling with the big drop in incoming tourists especially since Chinese form a big chunk and others are staying away for fear. 

Silver lining of hope

Now, you must be wondering that we did say it’s not all bad and reading so far there was little that seemed to balance out the dark, black outlook of gloom. In almost any event, bad news is generally balanced by a glimmer of opportunity at some other level.

Some industries do stand to benefit from this situation. For instance, Netflix’s stock price saw a spike the day news of Chinese quarantine came to light. Think about what you would do if you were forcefully stuck indoors for days and you will have the answer to why. Manufacturers of face masks are having their day in the sun. Most importantly, this event could force a more equitable distribution in the world manufacturing patterns with less dependence on China. Already, Google has announced a shift of the manufacturing of their next model of Pixel phones to Vietnam. Indian firms losing out to Chinese competition in the export market, could stand to gain from this unfortunate event.

As for the abatement of the epidemic, which threatens to become a global pandemic, many experts believe that it is more of a winter virus. Essentially, in higher temperatures the life of the virus reduces, bringing down the speed of spreading across populations. It is being hoped that atleast towards mid-March, temperatures will start rising and the tide will turn much faster. Looks like global warming might actually come to our rescue, for once.

What should you do as an investor?

The one thing being an investor teaches you is to deal with uncertainty. Today, considering the spread to countries outside China, with the coronavirus, we are at the brink where things could go either way – explode to burst in our face or gradually subside especially aided with shorter lives of the virus in hotter temperatures of upcoming summer. 

As Warren Buffet says, “be greedy when others are fearful and fearful when others are greedy”. Today is a time when most people around are fearful. Looking at historical trends, for rational long-term investors, this is the time to greedily lap up and buy as much as can be held on to for atleast the next 5 years. Over time, this will become one mere blip in the long trend curve of equity markets. 
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