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Is the Coronavirus a GDP killer? Probably not.

As global stock markets selloff in the face of uncertainty of a possible Coronavirus pandemic, some perspective is needed. Uncertainty is increased because no one believes China is being completely forthright and transparent about the problem. As we’ve often said, one of the problems with socialism/communism is that there is no value in telling the truth when the truth is bad news – those systems are ultimately built on lies. It should shock no one that China is not trusted to give the world the truth about the current situation with the Coronavirus.

There have been numerous global pandemics and ‘near’ pandemics in the last century. The ‘Spanish Flu’ in 1918-19 infected 500mm people and killed ~50mm globally (though some estimates put the number as high as 100mm). Somewhere between 30-50% of the world population was infected and 3-5% died. Empirical studies, such as Brainerd and Siegler (2002), suggest that a net positive effect on per capita income growth across the US in the 1920s. In contrast, the study by Bloom and Mahal (1997) of India in the post-period show no change in things like arable land under cultivation, hence little impact.

Malaria and HIV/AIDS also account for numerous deaths annually, with malaria killing about 1mm people annually and HIV/AIDS killing 3mm people at its peak in 2002. Again, the global effects are muted, though they can be felt keenly in the 'host' country.

More recently, the SARS outbreak was mainly felt in China and Hong Kong from both a health and economic perspective. Economically the main shocks were:

- A 2% increase on risk premium for their debt

- Downward shocks to the retail specific sales and service sector leading to a 10-15% drop in demand in those sectors, less so to other sectors based on exposure

- Increased costs in the service and retail related sector of ~5%, and less so for other sectors.

The effects of SARS obviously varied by country. Outside of China, the effects were mostly muted. The table below shows a breakout.

The SARS outbreak coincided with the end of the post Dot-Com Boom recession, thus a comparison of stock market behavior attributable to SARS is difficult given the volatility already in the market. In Nov 2002 the S&P was trading around 950 and fell to 800 (about 15%) by early March 2003, but by late May ‘03 had surpassed the Nov ‘02 950 peak and surpassed 1100 by year end. Bonds rallied while stocks fell and then reversed when stocks rose.

China is now a bigger part of the global economy than it was in 2002. Might it be better to look at a more ‘Asian’ approach, such as the ‘Asian Contagion’ of 1997? Possibly, but the Asian Crisis was really just a financial one that started with currency failure, the result of credit bubbles, and leverage in the world’s ‘hot’ economies. In Oct 1991, the S&P lost about 15% of its value from the early month high, but made a new high in early Dec 1997, just 5 weeks later. Bonds rose throughout the entire period.

It is far too early to tell how much impact the Coronavirus will have on either the global economy or global investments/markets. It will likely hit at least portions of the Chinese economy hard given it is the travel period associated with the Chinese New Year. It is unlikely though that we are looking at anything like the Spanish Flu, or even HIV/AIDS or Malaria outbreaks, at least not at this time given that we have dealt with similar viruses.

In the instances of SARS (2002-3) and the Asian Crisis (1997), there were sharp market selloffs with markets hitting new all-time or period highs with the 6 months following the initial selloff. And, outside of the ‘host’ countries, the actual economic effects were far more muted. Therefore, it seems probable that markets will overreact to the downside as they often do, and that recovery, when the Coronavirus is controlled, will be rapid.

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