In February, the outbreak of the Sars-CoV-2 Virus weighed heavily on financial markets. Companies had to deal with supply disruptions and/or had to temporarily cut back their production. The “supply shock” was accompanied by sluggish demand especially in the tourism and event sector as well as in terms of deferred corporate investment. Negative Capital market reactions are amplifying these effects through wealth erosion and lack of access to finance. Under these circumstances, lowered earnings expectations and reduced portfolio allocations to stocks seem rather rational.
In the meantime, economic countermeasures have been announced. The number of new infections in China has been declining since late February, thus indicating a period of about two months for the main burden to be carried. Intuitively, to assess the duration and extent of the economic effects, the related SARS Virus in 2003 may be a good starting point. At that time, China, Canada, Taiwan, Hong Kong and Singapore were the most hit. Except for China, they all experienced a declining GDP in the quarter (Q2) following the outbreak (CA -0,15% Q/Q, SI -1,5% Q/Q, HK -2,9% Q/Q, Taiwan -2,9% Q/Q, CN +1,8% Q/Q as compare to 2,7% in Q1). Stock markets and particularly the travel industry suffered losses, while oil prices fell. In 2003, GDP growth in the Asian region stabilized as early as in the following quarter. Canada showed growth as well, but the recovery was slower-paced.
Compared to SARS, the newer Sars-CoV-2 is more contagious and not restricted to certain regions, so that its systemic effects must be assumed higher. Not only are the direct consequences observed in far more countries, the more indirect effects on supply chains have multiplied as well. However, the economy can usually cope better with an exogen shock like this than with an endogen crisis like the financial crisis in 2008. Under the assumption that the main effects are absorbed within two months from the individual regional starting point, catch-up effects and an economic recovery in Europe may be expected after getting off to a bumpy start in the second quarter. The forward-looking financial markets should reflect the expected rebound even sooner. The fundamentally well-positioned companies enlisted on the Vienna stock exchange will have to adapt to the new circumstances and uncertainties related to the outlined scenario are very high. They are still appealing as long-term investments, however.
Author:
Uta Pock
Head of Research
VOLKSBANK WIEN AG
3 March 2020
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.