Will The China Coronavirus Strike Investments?

By Brad MacMillan

One of the potential disruptors of the generally positive economic news surfaced in the form of a viral outbreak in China last week.

Known as the coronavirus, as of this morning, there were nearly 2,800 cases in mainland China (mostly in the Wuhan area) and 80 deaths, for a mortality rate of about 3 percent.

There were also several other cases around the world, including five cases here in the United States. The comparison that is being made is to the last major new disease from China, SARS, in 2003.

Chinese Cities Shut Down

This virus is a big deal, and all countries are taking it seriously. While the World Health Organization has not yet declared a global emergency, China has mobilized and has quarantined Wuhan and two other cities to prevent the spread of the disease.

As a local business and transit hub, Wuhan has the potential to send any local infection around the world quickly, a situation that could be made exponentially worse by the mass travel associated with the Chinese Lunar New Year holiday.

To get an idea of how serious the government response has been, imagine Chicago being shut down at Thanksgiving here in the U.S. The response this time has been much faster, and much more effective, than it was with SARS.

What does this outbreak mean for us here in the U.S.? We have two different sets of worries. As people, will the disease affect us or our loved ones directly? Second, what, if anything, will this mean for our investments?

The U.S. Health Risk

From a U.S. perspective, things seem to be under control. First, this new virus is a much less dangerous disease than was SARS.

For SARS overall, there were more than 8,000 cases around the world and 775 deaths, for a mortality rate of more than 9 percent. The current virus, with a current mortality rate of 3 percent, is simply less dangerous.

Second, there are very few cases here in the U.S. (two reported as I write this). Further, surveillance is now in place to try to catch new patients coming in from the risk areas. Again, looking back at SARS, there ended up being just 27 cases here and no deaths.

Nothing is certain, but the U.S. has excellent public health institutions for just this reason. The risk to our health is not quite zero, but probably pretty close. Again, the new disease does not seem to be nearly as fatal as SARS, and the response has been faster and more complete this time.

The Investment Risk

From an investment standpoint, the damage may be more substantial. But, again, it should not be that bad, especially here in the U.S.

In China, SARS hit growth hard for a short time, but then it passed quickly. Most of the damage came from consumers staying in and not spending, rather than from something fundamental. So, when the consumers came back out, growth resumed.

We might see that dip in consumer spending again, and even worse this time, as the timing at the start of the Lunar New Year will certainly hit spending. More, consumer spending is now a larger part of the Chinese economy, so the hit might be worse.

The South China Morning Post reports an estimate of a loss of between 0.5 percent and 1 percent of growth, off a 5.9 percent starting point. This drop would be material, but not catastrophic.

Looking back at SARS, there was essentially no effect on economic growth here in the U.S. While there was a sharp but short pullback in the stock market, it was not necessarily due to SARS alone. In any case, the market bounced back quickly. Over the course of a year, SARS was a nonissue for U.S. investors.

With the more favorable conditions in place this time, even if this new disease proves to be much worse than it looks at the moment, here in the U.S. the damage will be limited—and should pass quickly.

Pay Attention, Don't Worry

That’s not to say the disease will not get worse. It might, and we need to keep an eye on the situation. Even if it does, however, the fact that the problem is now well known should keep the overall impact from being something we need to worry about over the long term.

In the end, the coronavirus is just one more item on the list of things we should pay attention to—but it is not something I am worried about at the moment.

Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held Registered Investment Adviser-broker/dealer. He is the primary spokesperson for Commonwealth’s investment divisions. He is also the author of Crash-Test Investing, a must-read primer for Main Street investors seeking to help insulate their portfolios against a market crash. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan. Forward-looking statements are based on our reasonable expectations and are not guaranteed. Diversification does not assure a profit or protect against loss in declining markets. There is no guarantee that any objective or goal will be achieved. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is not indicative of future results.