A look back at the SARS outbreak of 2003 offers useful perspective on current fears about the spread of COVID-19.
Andrew Graham said:
“We suspect the market will follow a similar pattern and will recover rapidly when there is evidence that the number of new cases has peaked.”
On 30th January 2020 The World Health Organisation (WHO) declared1 the new coronavirus a Public Health Emergency of International Concern (PHEIC). This effectively triggers a higher profile reaction from the WHO, involving higher cooperation and the provision of technical support2, not only to China but also to other countries that may lack the infrastructure to deal with a spreading outbreak. For laypeople, there is now a new official name: COVID-19.
As of 14th February, China has announced that 63,851 people have contracted the virus and 1,380 have died.
History offers the best guide for us in terms of how the stock market may perform against the backdrop of the ongoing coronavirus (2019-nCoV) outbreak. The most obvious reference point is the SARS (Severe Acute Respiratory Syndrome) outbreak of 2003. From its discovery in February 2003, the SARS outbreak lasted approximately six months as the disease spread to more than two dozen countries in North America, South America, Europe, and Asia before it was stopped in July 2003.
Below is a chart of the MSCI AC Asia ex Japan spanning the period immediately before and after the outbreak. Firstly, it is important to note that it was a very different world back then: China is 16.3% of world GDP today versus 4.3% in 2003 (Source: IMF); and the SARS outbreak occurred during a period of very weak market sentiment, while the coronavirus came in previously positive market environment.
However, there are some similarities in terms of the disease: we can tentatively say that the reproduction number3 of the virus is similar to SARS, its incubation period appears to be a little longer and the mortality rate appears to be broadly similar. Additionally, the Chinese authorities reported the coronavirus very quickly (with SARS it took them almost 3 months) and have responded more aggressively in terms of its containment strategy. It is therefore hoped that the time to halting its expansion will be similar to SARS (i.e. around 4 months from the date when the WHO announced a global emergency).
Asian stock markets only became aware of SARS in early / mid-March 2003 when reports of the illness began to emerge, with the WHO formally issuing a global alert on 12th March 2003. As you can see in the chart below, the market bottomed shortly thereafter.
Stock markets are discounting mechanisms and respond swiftly to bad news. By the time of the WHO confirmation, markets were already partially pricing it in. The Asian markets remained volatile within approximately a 10% range and began to recover as data revealed that the number of new SARS cases appeared to be peaking (the peak turned out to be the 23rd April). A full-blown rally was underway by July when the US CDC (Center for Disease Control) lifted its travel alert for China, with the WHO declared global containment a few days later.
Source: MSCI. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
We suspect the market will follow a similar pattern and will recover rapidly when there is evidence that the number of new cases has peaked. For SARS approximately 6 weeks elapsed from the initial global alert from the WHO and the emergence of enough data to encourage investors that the worst was past. Investors will be watching closely for signs of this.
Since the coronavirus hit the headlines, MSCI AC Asia ex Japan declined by 7.5% from its January 2020 highs, but at the time of writing has recouped around one third of this; the Chinese A share markets, which were closed for an extended Lunar New Year holiday, re-opened today and caught up with other regional indices, closing sharply lower on their first day of trading (SSE Composite -9.95% and the China Shenzhen SE A Share Index -6.61%) but made meaningful recoveries since then (SSE recouping 40% of losses and Shenzhen 75%).
Valuations today are higher than in 2003: MSCI AC Asia ex Japan FY1 price/earnings ratio is 15x versus 11.6x at end February 2003 and the FY1 price/book ratio is 1.56x versus 1.23x. It is not obvious to us that this valuation gap will be completely closed during this ‘risk-off’ phase as interest rates are lower today and governments are more primed today to respond to market volatility than in 2003.
Additionally, prior to the outbreak there was accumulating evidence that the global cycle, backed by supportive policy action, was beginning to improve. If the market does move to fresh lows, we expect it will only hold those levels briefly and rebound sharply on the first indications that the number of new cases of infection has peaked.
Meanwhile, bond funds saw significant inflows in the last week, as investors are beginning to bet that the peak of the outbreak is near and concerns over the negative impact on the world economy are outweighed by the expectation of big stimulus from Beijing and other capitals, as central banks feel obliged to be proactive, to compensate for a soft first quarter of economic activity. The buying has been fairly widely spread, boosting Greek bonds, as proxies for a renewed appetite for risk assets.
3 A statistic calculated by epidemiologists which measures the number of people that one person can infect
China A-shares are the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE).
Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.
The International Monetary Fund (IMF) is an international organization of various member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.
Morgan Stanley (MS) is an American multinational financial services corporation headquartered in the Morgan Stanley Building, Midtown Manhattan, New York City.
The MSCI Asia ex Japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan.
The price-to-book (P/B) ratio is a stock's price divided by the stock’s per share book value.
The price-to-earnings (P/E) ratio is a stock's price divided by its earnings per share
The Shenzhen 300 Index is a capitalization-weighted index that tracks the daily price performance of the 300 most representative class A share stocks listed on the Shanghai or Shenzhen Stock Exchanges.
The Shanghai SE Composite is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the UK Financial Conduct Authority.
Andrew Graham, Head of Asia, Martin Currie (a Legg Mason affiliate)
Andrew joined Martin Currie in May 2010 and heads our Asia team. He is lead manager of the Martin Currie Asia Pacific and Asia Long-Term Unconstrained strategies. He joined us from Sofaer Global Research, bringing with him over 20 years’ experience of managing Asia-Pacific equities. At Sofaer, where he was a partner, Andrew managed the company’s Japan absolute return fund and co-managed its Pacific-region absolute return fund. Prior to this he spent five years as senior vice president at Putnam Investments, where he co-managed its International Capital Opportunities Fund, focusing particularly on the Asia-Pacific region. Earlier in his career Andrew held portfolio management roles at both Scottish Widows Investment Partnership and Kemper Investment Management.
The information, materials or opinions contained on this website are for general information purposes only and are not intended to constitute legal or other professional advice and should not be relied on treated as a substitute for specific advice of any kind.
We make no warranties, representatives or undertakings about any of the content of this website (including without limitation any representations as to the quality, accuracy, completeness or fitness of any particular purpose of such content, or in relation to any content of articles provided by third parties and displayed on this website or any website referred to or accessed by hyperlinks through this website.
Although we make reasonable efforts to update the information on this site, we make no representation warranties or guarantees whether express or implied that the content on our site is accurate complete or up to date.
Our emails are designed to be topical and engaging, however if you don’t like what we send, you can unsubscribe at any time. We promise never to pass your details on to a third party.