What is CV19 - the Coronavirus

The impact of a pandemic virus

The fall of the markets that has taken place over the past week is only comparable to the outbreak of the Great Depression. How else does coronavirus affect the economy

Humanity more than once in its history has faced epidemic tsunamis that claimed from several thousand to a million people. The 1918th, 1957th, 1968th (Hong Kong flu), the spread of Ebola in 2003-2008 and the “swine flu” in 2009-2010 - this is not a complete list for the last 120 years.

Based on statistics, the epidemiological problems of the beginning of 2020 may be larger than the SARS epidemic (Severe Acute Respiratory Syndrome). This epidemic has not brought the world a mathematically significant decline in GDP or market volatility. Coronavirus can even surpass the impact of the 1968 Hong Kong flu epidemic, whose economic effect is estimated at 0.5% of world GDP.

At the same time, it is unlikely that the current epidemic (whether it will be a pandemic - the next two months will show) will reach the scale of 1968, that is, 500 million sick and 4 million dead. The new virus spreads “worse” (in 1968, a month after the first case was registered, there were 500,000, not 20,000, as at the end of January 2020).

True, today's mortality rates (the only reasonable indicator is the ratio of the dead to the sum of the dead and fully recovered, the remaining coefficients are irrelevant) are much higher - about 8%. The dynamics of this indicator show a rapid bearish trend, and most likely, its final level will not exceed 3-4%.

However, this does not mean that the new virus is less dangerous for the world economy than the Hong Kong flu. Quite the contrary: firstly, in 1968 no one took unprecedented quarantine measures that are actively applied today - and they significantly affect the economy. Secondly, the share of China and other countries in which the virus has already appeared in the international division of labor is now much higher than in 1968. Finally, thirdly, markets today are more prone to panic reactions than 50 years ago.

In mid-January 2020, the spread of the Wuhan virus was seen as a threat to China itself. The markets, seeing the active measures taken by the Chinese authorities, and knowing the country's enormous potential for supporting the economy, were not very worried.

The slowdown of the Chinese economy in the general context of the global economy was considered as a likely, inevitable, but overcome the event. Given the country's resource, investors relied on the fact that government orders, support for enterprises of various levels, as well as a weakening of monetary policy by the People's Bank of China, would be able to maintain the economic growth rate.

Even forecasts of a drop in growth rates in the first quarter to 3, -3.5% with the possibility of recovery from the second quarter to 4% were perceived as “acceptable losses”. They can be compensated by the efforts of governments and central banks of different countries, able to offer fiscal and monetary support measures. This mantra suited many: stocks, which are a sensitive barometer of the state of the economy, gradually slipped into "minus", while bonds grew in price on expectations of lower interest rates.

The gradual spread of the virus around the world and, in particular, the uncontrolled outbreak in Italy at the end of February, turned out to be extremely sensitive for investors.

US Treasury Yields Fall 40-60 b.p. relative to the December levels, and the curve again became inverted. Highly profitable assets and bonds in emerging markets, the yield of which is so low that even a minimal shock, could give out its serious growth, were trembled.

In the last week of February, the markets show the rate of decline, comparable only to the beginning of the Great Depression. The situation is aggravated by the fact that most large non-index investors were very heavily invested by the time the fall began. For them, a game of nerves begins - the desire to close profitable positions "until something happened" can develop into "sell everything that is, before it's too late".

One cannot but admit that even without any coronavirus, world markets were very expensive by the time the correction began. Risk premiums, although not included in the "crisis zones," were at less than 2% per annum for stocks and debts. Debt market spreads were at a record low. So there are fundamental reasons for the correction.

Meanwhile, following the reasonable advice of Warren Buffett, investors should look at the long-term situation when assessing market prospects. In the absence of changes that "will be in force" after months and years, all market drawdowns will be only temporary adjustments. They will be redeemed after a short period - which means they are an opportunity to acquire good assets cheaper than before.

From the long-term situation, no changes are taking place. An epidemic (and even a pandemic) will end the same way as the previous ones ended - for the economy (unfortunately or fortunately) it does not matter how many people die - 5,000 or 500,000 - these are numbers that do not affect the long-term situation.

Of course, the epidemic is causing and will continue to cause significant problems in the current economic life - the shutdown of production, a decrease in the level of service consumption, and gaps in the supply chain. The damage from the epidemic could lead to a significant drawdown in China's GDP growth rate in 2020 and even a sharp increase in bankruptcies in the country (although the authorities have already committed to preventing this).

In other countries, the situation may be similar - in Italy, the epidemic can provoke a severe crisis, and the development of the epidemic in small countries, in which tourism plays a large role in the economy, can lead to economic disaster.

But the epidemic does not affect the demand for physical goods (rather, it even increases it); does not affect production capacities (this is not a war); does not affect labor resources (no matter how cynical it sounds, the percentage of dying people of working age is much less than the percentage of dying elderly people).

A vaccine against the virus will appear within six months; summer will reduce the contagiousness (the property of infectious diseases being transmitted from sick people to healthy susceptible people by transmitting their pathogen through direct contact or transmission factors - Ed.) and the number of cases of infection; quarantine measures will yield results - at the cost of significant losses of transport companies, hotels, and travel agencies.

With high probability, if not by summer, then by autumn we will see that the outbreak is suppressed (already now the growth rate of the number of cases in the epicenter is falling day by day), and the secondary outbreaks are dying out.

Another cynical remark is the importance of the regional economy for the world and the ability of local authorities to take effective quarantine measures, in general, is proportional. Yes, the spread of the epidemic in African countries is a great threat to these countries and a significant one for the countries with which they have transport links. But even this (generally speaking, terrible) situation is not a significant threat to the global economy - it is practically independent of African countries.

At the same time, the end of the epidemic, the opening of free transport links, the return to work of all enterprises will coincide with the realization of a significant pent-up demand (which was postponed due to interruptions in supply) and, possibly, premium demand after the "big good news".

Against this background, the financial authorities of the largest countries have the opportunity to further mitigate monetary policy and, of course, will use them to enable economies to catch up on the pace lost in the first half of 2020. The authorities of China and Hong Kong have already begun giving out money, compensating citizens and businesses that are losing income, their losses.

By the end of 2020, the economy will finally return to normal, estimates of future profits will return to the "pre-epidemic level." Markets will have no reason not to start looking for "old highs" - especially in the face of a milder monetary policy.

Under these conditions (we are at the end of February 2020), it seems unreasonable to rush to liquidate your portfolios "at any price." You may be lucky, and you will be able to later buy assets cheaper - but how do you know that the time has come to buy them?

Positive news on the epidemic (the outbreak is localized in Italy and Iran; the vaccine is approved and goes to clinics; the number of patients in China has begun to decrease) can cause a rebound in markets that you simply cannot catch. Remember, in the middle-end of 2018, the increase in the rate of the Federal Reserve System (FRS) caused a correction in the markets. Those who did not increase but also did not reduce their portfolios behaved most wisely. The sellers could lose a lot, not having time for the rebound that occurred in early 2019.

For those who are now thinking about investing, two strategies have worked well during turbulence: these are investments in arbitrage portfolios and short debts of reliable issuers. The former should yield very high incomes in 2020; within the framework of the latter, it is possible to purchase high-quality debt obligations significantly cheaper and get (due to the short term to maturity) a stable coupon income and an increase in value at the end of the crisis period.

About the author: Melisa Marzett is a freelance writer who is currently writing articles about everything and anything working for essay-editor.net english companies. She is fond of psychology, sports, handmade and cooking from time to time. She is a Gemini and, therefore, quite a moody person. Melisa likes listening more than talking and traveling throughout the world.