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Coronavirus and its Potential Impact

  • 2019-nCoV” originated out of the Chinese city of Wuhan (Hubei province) and is a new strain of coronavirus belonging to the same family as the one that caused the SARS (Severe Acute Respiratory Syndrome) crisis in 2003. The World Health Organization has declared a health emergency with concern that the outbreak could spread to countries with weaker health systems, but at the same time saying that travel and trade restrictions were not necessary.

 

  • At time of writing, the 2019-nCov has inflicted more than 17,000 cases in 24 countries, resulting in 361 deaths, or a mortality rate of less than 3%. SARS caused 8,098 cases, with 774 deaths in 37 countries or a mortality rate of about 9%. A deadlier virus caused the Middle East Respiratory Syndrome (MERS), afflicting 2,494 patients with 858 deaths since 2012, with a much higher mortality rate of 34%. Annually, 3-5 million flu cases are reported and around 650,000 deaths globally from the common flu, or a 17% mortality rate.

 

  • Economic impact is likely to be negative in China, but temporary. Drastic policy intervention to prevent the spread of the virus has been implemented and most provinces in China have issued the highest public health emergency. As a result of the precautionary measures, China and Hong Kong are likely to suffer a severe blow to services activity which may temporarily impact the global economy through supply chain disruptions. However, as with other natural disasters, the coronavirus largely does not represent a permanent loss of output. Most of the negative impact on China’s economy is likely to be concentrated in Q1 and Citi analysts expect a GDP slowdown to 4.8% YoY in Q1. Growth may still be sluggish in Q2 but full-year growth is presently expected at 5.5% YoY.
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  • Diversification is key. With world growth dynamics unlikely to be derailed and markets lurching suddenly and sharply, Citi’s Global Investment Committee has held to their current asset allocation – overweight global equities and underweight global fixed income. Overweights in US treasuries and other high-grade bonds (within the overall underweight global fixed income) and overweight in gold provide risk mitigation.  

 

  • Given the outperformance of US stocks and bonds relative to Greater China markets, equity overweights in US and some Asia Pacific markets have been reduced, adding exposure to China / Hong Kong. Headline risk may continue in coming weeks as the situation continues to evolve. However, as history has shown, if the fundamental growth picture remains intact, the impact of geopolitical or public health events, though unfortunate, tend to be fleeting.

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