- Infection and fatality rates of the coronavirus are increasing daily and containment outside of China is a key development to watch.
- Case numbers in the U.S. remain small and experts believe overall risk of contraction in the U.S. remains low.
- Early estimates are that total financial costs of the virus will be higher than the 2003 SARS outbreak, but still only about 0.25% of global gross domestic product (GDP).
- Impact to 1Q20 GDP could be 1%–2% in China and 0.20%–0.40% in the U.S. If containment occurs afterward, we would view this impact as manageable going forward.
- We believe equity and credit markets will likely continue to be volatile but remain well positioned if containment of the virus is achieved in the months ahead. We continue to maintain our year-end target of 3,600 on the S&P 500® and believe high-yield and investment-grade bonds can offer coupon-type returns in the year ahead.
Unknown to all but a select few just a few weeks ago, the coronavirus has now taken center stage as the predominant short-term risk to the medical and financial communities. As the numbers of infections and fatalities mount, potential collateral damage for the financial markets, either real or speculated, has become a central focus. As a result, investors are now attempting to assess a risk that up until recent days was not on anyone’s radar.
The impact on U.S. and global markets was sharply negative at the end of January, with the Dow Jones dropping more than 600 points (2.1%) on the last day of the month. Along with the S&P 500®, these two indices are off more than 3% from their record highs of a couple weeks ago. The 10-year U.S. Treasury yield has dropped more than 0.30% since mid-January to 1.51%, and high-yield credit spreads have risen over that same time from about 0.60% to 3.95%. Internationally, the EAFE is down about 4% from mid-January and the MSCI Emerging Markets Index approximately 9%. The price of crude oil has also seen a precipitous drop since early January of almost 20%.
The past week was one of grim news medically as total reported cases of the coronavirus, which originated out of Wuhan, China, exceeded 14,000 with fatalities reaching more than 300. While these numbers are still small in comparison to established viruses such as the flu (which infects approximately 20 million annually in the U.S. with fatalities of about 10,000), it is the rate of infections that have medical experts, such as those at the World Health Organization who declared the virus a global health emergency, voicing great concern. How quickly and widely the virus moves outside of China is perhaps the key area of global focus.
While numbers in the U.S. remain barely identifiable — as of February 2 only eight cases had been reported — news of the first person-to-person transmission in Boston combined with confirmed cases within major cities such as New York and Chicago have been enough to create widespread angst. In addition, quarantine efforts now include people by the hundreds here in the U.S. and the millions in China.
From a commercial standpoint, major airlines including Delta and American have now canceled all flights into China, and Apple has temporarily closed its stores and offices in mainland locations there. While the corporate reactions to the coronavirus are fluid and evolving on a day-to-day basis, the trends are certainly emerging as potentially meaningful at this early stage.
With all of this in mind, we believe some of the following points are the most important to investors:
- Early estimates indicate the costs of the coronavirus could total in the range of $150–$200 billion, which would represent about 0.25% of the global economy. However, this could disproportionately hit China more than most other regions — the estimated range of costs would total more than 1% of its total economy.
- More early estimates appear to be taking about 1% off of China GDP growth for 1Q20, though some of these are coming in at closer to a 2% negative impact. This could potentially put China’s 1Q20 GDP growth in the 4%–5% range, its lowest since the early 1990s.
- In regard to the potential negative impact to the U.S. economy, most early estimates are circling within a range of 0.20%–0.40% to 1Q20 GDP growth, currently projected by most to ultimately be in the 2% range. We caution that these are very preliminary and could move in either direction. In the event the virus becomes contained in the upcoming months, we would view this impact as manageable and likely to be made up in future quarters.
- As a historical comparison, the SARs virus of 2003 and Ebola virus scare of 2013 wound up costing the global economy approximately $40 billion and $50 billion, respectively. Impacts to global growth in these cases were basically miniscule at less than 0.10%. However, due to the faster-paced spread of the coronavirus and the fact China represents a larger percentage of the global economy than it did during these two previous outbreaks, the initial projections are coming in higher.
- China also appears prepared to implement monetary and fiscal stimulus in order to provide liquidity and help to sustain market confidence. The initial injection into the markets looks to be about 1.2 trillion yuan ($174 billion). Reserve requirements ratios for China banks are also likely to decline.
- Finally, in the U.S., where case numbers are still very small, there remains a better chance of containment and far less, if any, lasting economic impact. This would be consistent with commentary on January 31 from the newly formed President’s Coronavirus Task Force, which stated the “risk of the American public is low.”
The coronavirus has been a human tragedy in recent weeks, and from a market perspective we certainly expect more volatility to follow. However, should containment of the virus look achievable in the next few months, there will likely be limited impact to the U.S. economy and a recoverable scenario in China. Therefore, we continue to maintain our year-end target of 3,600 on the S&P 500 and believe high-yield and investment-grade bonds can offer coupon-type returns in the year ahead. That being said, investors may need to buckle up for higher volatility in the immediate days and weeks ahead as markets incorporate this new risk.
Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be suitable for all investors.
Past performance does not guarantee future results.
Fixed income investing is subject to credit rate risk, interest rate risk, and inflation risk. Credit risk is the risk that the issuer of a bond won’t meet their payments. Inflation risk is the risk that inflation could outpace a bond’s interest income. Interest rate risk is the risk that fluctuations in interest rates will affect the price of a bond. Investing in floating rate loans may be subject to greater volatility and increased risks.
Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.
Investments in global/international markets involve risks not associated with U.S. markets, such as currency fluctuations, adverse social and political developments, and the relatively small size and lesser liquidity of some markets. These risks may be greater in emerging markets.
Alternative investment strategies may include long/short and market neutral strategies; bear market strategies, tactical strategies (such as debt and/or equity: foreign currency trading strategies, global real estate securities, commodities, and other nontraditional investments).
The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security. This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs, or financial situation. The value of any investment may fluctuate. This information has been developed by Transamerica Asset Management, Inc. and may incorporate third-party data, text, images, and other content to be deemed reliable.
Comments and general market related projections are based on information available at the time of writing and believed to be accurate; are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions.
Transamerica Asset Management (TAM), is the asset management business unit of Transamerica. TAM consists of Transamerica Funds, Transamerica Series Trust, and Transamerica Asset Management, Inc., an SEC-registered investment adviser.