Coronavirus escalation could spur 10% fall in global equities, SocGen says

The coronavirus epidemic has already infected 5,974 people in China and spread to 18 countries. Photo / AP

An intensification of the coronavirus epidemic, which has already killed more than 130 people in China, could prompt a 10 per cent correction in global equities, strategists at Société Générale say.

The Wuhan-linked virus, which comes from the same family as Sars, has already infected 5974 people in China and spread to 18 countries including the US, France, Germany, Japan and South Korea. It has also led to the temporary closures of international businesses like McDonald's and H&M across parts of China and prompted worries about the impact to the economy from curbs to consumer spending, business operations and travel.

"If China were to be hit again, its 18 per cent weight in the global economy would have an overwhelmingly negative effect on the rest of the global economy," Alain Bokobza, strategist at SocGen, said.

For the FTSE All World Index, a correction — defined as a drop of 10 per cent or more from a recent peak — of the magnitude described by Bokobza, could wipe US$5 trillion ($7.6t) off the market capitalisation of the index. Thus far global equity markets have seen much shallower declines.

The FTSE All world index, which stumbled 1.6 per cent on Monday when fears of the fast-spreading virus came to a head, has since recouped a chunk of its losses and is now down just 0.9 per cent for the week. Chinese markets had been closed in observance of the New Year holiday and the Hang Seng, the first to reopen on Wednesday, fell 3 per cent as it played catch-up with the rest of the world.

To understand how severe the fallout from the coronavirus could be, investors and market prognosticators have turned to the impact of Sars between 2002 and 2003.

However, the repercussions for equity markets from the coronavirus could be far wider because of China's economic rise over the past 17 years and its greater integration with the global economy.

As ING points out, global air traffic is now twice as large as it was in 2003 and Chinese tourism at the time of the Sars outbreak was more domestically oriented compared to the present day, when Chinese nationals have "become a significant driver of global tourism".

They caution that slowing demand from China would impact the global economy, which is at present trying to recover from the US-China trade war.

The market backdrop to both outbreaks is very different. "Sars happened at the late stage of a long bear market," according to Frank Benimra, strategist at SocGen, when global markets were trading at a much lower valuation. By comparison, the present outbreak "is happening in a risk-on period and at a time when China is much more integrated in global markets and economies".

Written by: Mamta Badkar

© Financial Times