Stocktake: Coronavirus begins to cause trouble for stocks

Markets remain calm over outbreak but banks warn of significant correction

China’s economy is much larger now than in 2003 with the result that  the coronavirus will have  a greater impact on the world economy than Sars did. Photograph: David Chang/EPA

China’s economy is much larger now than in 2003 with the result that the coronavirus will have a greater impact on the world economy than Sars did. Photograph: David Chang/EPA

 

Until yesterday’s carnage, stock markets had largely shrugged off the ongoing coronavirus outbreak, with US and European markets hitting more new highs last week. Not panicking in the face of scary headlines is a wise strategy, but the evidence was mounting that investors become a little too casual.

Apple last week warned that it could miss revenue expectations on account of the coronavirus outbreak and other companies will follow suit, warned Goldman Sachs last week. The virus’ impact on earnings was not reflected in stock prices, said Goldman, “suggesting that the risks of a correction are high”.

Société Générale, too, is concerned, recently cautioning that global equities could suffer a 10 per cent correction should the epidemic intensify.

Both strategists stress that comparisons with the Sars outbreak in 2003 are misguided. Firstly, China’s economy is much larger now than in 2003. Secondly, the Sars outbreak occurred near the end of a long bear market, when stocks were trading at low valuations, whereas the current market is very much in a risk-on period where investors have become conditioned by central banks to buy every dip.

Of course, long-term investors need not pay much heed to this agonising; markets rise and fall all the time and trying to time these movements is an unproductive game. Still, rising valuations means there’s not much room for error, so investors shouldn’t be surprised that the virus’ unexpectedly rapid spread is now catalysing market volatility.

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