Lessons from China: Five stages of COVID-19 impact on markets

I left Shanghai, China on 21 January, just as the initial virus news was spreading in the Chinese media but had not quite reached international news outlets. I spent the following two weeks in Hong Kong as the city of Wuhan was locked down and medical professionals in Hong Kong threatened to strike unless borders with the Mainland were closed. The following two weeks I spent in Singapore as coronavirus  cases started to spread and authorities initiated contingency planning. Over a month later I find myself in the UK as cases in Europe top 2,000 and history repeats itself in a different geography.

These are my observations from the road on the five distinct stages of coronavirus impact on the markets:

Stage one: “Someone else’s problem”

Characteristics: Distinct lack of national awareness and limited domestic media coverage [Most countries are past this stage as of 10th March]

Market reaction: No significant impact

Stage two: “It’s just like flu”

Several comparisons to flu, a manageable virus for most and yearly occurrence. No real precautions taken at this stage. [Latin America potentially still in this phase]

Market reaction: Limited, with fixed income in-flows

Stage three: “Panic buying toilet paper”

Limited public knowledge of the virus, but awareness that coronavirus is potentially more serious than ordinary flu. Panic buying for potential quarantines occur, although case numbers remain in the low hundreds. [Status in the UK, North America and SEA (ex. Singapore) as of 10th March]   

Market reaction: Volatile with equity market declines and recovery

Stage four: “Mass lockdowns”

Virus cases reach 1,000+, requiring enforced quarantines and lockdowns. Schools and universities are suspended, and businesses require workers to work from home. [Currently Italy, Spain, South Korea and Japan as of 10th March]   

Market reaction: Sharp declines in equity markets, followed by partial recovery on supportive monetary or fiscal policy announcements

Stage five: “Slow recovery – back to work”

Virus cases stabilise and start to decline. Workers cautiously return to work and pressure on healthcare systems reside. [China, Hong Kong, Singapore]

Market reaction: Positive and sharp recovery with significant equity inflows  

We expect further downside in US equity markets, however we have been adding  to our positions over the last two weeks taking advantage of the opportunity to invest in high quality, high cash flow businesses at discounted valuations taking care to select investments based on value and not price.      

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